UK inflation fell more sharply than expected in November after hitting a 41-year high high in October.
The annual rate of consumer price inflation (CPI) dropped to 10.7% in November from 11.1% in October, said the UK’s Office for National Statistics (ONS).
This was a bigger fall than the decline to 10.9% which economists had forecast in a Reuters poll.
The news offered some comfort to the Bank of England (BoE) — the UK’s central bank — as it prepares to raise interest rates again.
“Prices are still rising, but by less than this time last year with the most notable example of this being motor fuels,” said ONS chief economist Grant Fitzner.
Economists mostly expect the UK central bank will raise rates again on Thursday to 3.5% from 3%, despite the BoE’s own forecasts that the economy is heading into a long recession.
REACTION:
Daniel Mahoney, UK Economist at Handelsbanken: “UK CPI inflation appears to be past its peak. UK CPI y-o-y fell from its October level of 11.1% to 10.7% in November, which was 0.2pp lower than market expectations.
“The drop in the annual rate of CPI inflation reflected price changes across a wide range of items including motor fuels, second-hand cars, tobacco, accommodation services, clothing and footwear, and games, toys and hobbies.
“The largest upward effect, which partially offset this, came from increases in prices for alcohol in restaurants and pubs …
“Along with the headline rate of inflation, core CPI (excludes energy and food) also saw its rate ease: y-o-y core CPI dropped from 6.5% to 6.3% in November (consensus: 6.5%).
“This was driven by a drop of 0.7pp in goods inflation while services inflation edged up 0.1pp (comparing Oct and Nov’s y-o-y figures). Y-o-y, goods CPIH inflation stands at 14.1% and services CPIH registers at 5.4% for November …
“After today’s lower than expected CPI inflation print and yesterday’s figures showing tentative signs of easing in the labour market, it seems highly likely that the MPC will go for a 50bps increase tomorrow.
“We maintain our view that the MPC will hike by 50bps again in February next year and then leave rates at a peak of 4%.
“In terms of the CPI inflation outlook, it looks as though we are now beyond peak inflation and finally on a downward trajectory.
“Following a dramatic drop in shipping costs and falls in supply chain disruption, we expect core goods inflation to continue dropping into 2023.
“However, services inflation will be heavily influenced by nominal pay levels that are registering above 6% and is therefore likely to remain much stickier.
“It seems likely that we will have to wait until at least 2024 before reaching inflation levels anywhere near to the Bank of England’s target.”
Kevin Brown, savings specialist at Scottish Friendly: “Inflation has surprised with the latest figures coming in lower than was expected by markets. With the biggest downward pressure motoring fuels and second hand cars, there may be some relief finally for motorists especially as winter bites.
“But the energy crisis clearly isn’t letting up, and inflation is now becoming more clearly driven by this key problem. The energy price guarantee (EPG) in October seems to have staved off worse rises, but this help isn’t going to last much beyond March as the EPG increases, piling on the pressure after a difficult winter.
“It will be interesting to see how the Monetary Policy Committee reacts tomorrow. Rate hikes have been behind the curve for some time, with inflation getting out of hand many months ago now. But whether they continue the path of big hikes or take a pause now that inflation is faltering, remains to be seen.
“Households are still vulnerable to fluctuating gas and electricity prices and rising mortgage and borrowing costs could offset any reduction families see in other areas next year too.
“The pressure on households’ disposable income isn’t suddenly going to let up, so it’s important that people try to put away any extra money they do have when the opportunities arise.
“That might mean saving into cash for easy-access, or if it’s for the future, investing some of it as that at least offers the possibility of above inflation returns.”
Joshua Raymond, director at online investment platform XTB.com:
“The faster than predicted slowdown in UK inflation to 10.7% in November – alongside yesterday’s data out of the US which also showed a faster cooling in prices – raises hopes in the near term that central banks such as the Bank of England may not need to hike interest rates as much as the market is currently expecting.
“Make no mistake, inflation at 10.7% remains severe and the Bank of England must continue to act to help curb spiralling prices by raising UK interest rates. But this reading in November may help to convince some members of MPC to refrain from the more aggressive hikes that we’ve seen in recent months.
“We must also recognise that whilst energy prices continue to dominate inflationary pressures, we would have seen an even faster slowdown in UK inflation were it not for Food and non-alcoholic beverage inflation, which rose to 16.5% from 16.4%.
“That tells you the cost of living crisis remains severe. Yet this inflationary reading may come too soon to change the opinions within the Bank of England’s MPC, who remain highly likely to raise interest rates by another 0.5% to 3.5% when it meets on Thursday.”
Victoria Scholar, Head of Investment, interactive investor: “The UK’s annual inflation rate fell from a 41-year high in October of 11.1% to 10.7% in November, which was better than analysts’ were expecting for 10.9%.
“Transport inflation fell for a fifth consecutive month with easing prices of motor fuels and second-hand cards. Fuel inflation fell from 22.2% in October to 17.2% in November.
“Some of the easing was also because of a technicality relating to a change last year in how the figure is calculated. Offsetting this to some extent, were higher prices for alcohol in restaurants, cafes, and pubs.
“November’s reading is the first indication that inflationary pressures in the UK could be starting to ease after a year and a half. Whether we are passed the peak is yet to be seen with inflation still stubbornly high, stuck in double digits, and sharply above the Bank of England’s 2% target. The central bank is likely to raise interest rates again tomorrow in an attempt to cool economic activity and temper inflation.
“Pressures on the cost-of-living are still acute with wages failing to outpace inflation, resulting in a drop in the affordability of goods and services in our economy. This has resulted in widespread strikes across many industries as the summer turns into the winter of discontent among workers.”
Nicholas Hyett, Investment Analyst, Wealth Club: “While the annualised rate of inflation slowed in November, consumers are unlikely to feel any relief in the cost of living crisis.
“Prices overall continue to rise, with food prices in particular rising at their fastest rate in 45 years. What relief there is for consumers comes mostly in transport – but petrol prices have remained parked month-on-month rather than going into reverse.
“This raises some difficult questions for policy makers. On the one hand headline inflation is easing, but whether that’s due to a weakening in local demand or simply global commodity prices is less clear.
“Areas like hospitality, which are more affected by domestic inflation, continue to see prices rise substantially, suggesting ‘core inflation’ remains untamed. That’s a headache for central bankers – raising rates might help bring domestic inflation under control, but it will also exacerbate the cost of living crisis and potentially condemn the UK to a painful recession.
“Today’s inflation numbers really raise more questions than answers. Is this just a blip in an ongoing inflationary trend or the beginning of the end of the inflationary bubble?
“We will have to wait for more data to be sure. The Bank of England Monetary Policy Committee doesn’t have that luxury though – tomorrow’s interest rate decision will tell us a lot about where they think the economy is heading.”