Inflation in the UK slowed by more than expected in October as household energy prices fell and services sector price growth also eased.
Annual consumer price inflation for the UK fell to a lower-than-expected 4.6% in October from 6.7% in September, official data showed on Wednesday.
The UK central bank’s forecasts and the consensus from a Reuters poll of economists had pointed to a reading of 4.8%.
The news provided some relief to the UK central bank and UK Prime Minister Rishi Sunak.
REACTION:
Victoria Scholar, Head of Investment, Interactive Investor: “UK CPI inflation dropped by more than expected to 4.6% in October from 6.7% in September, hitting a two-year low. Core inflation also fell to 5.7%, the lowest level since March 2022.
“Energy costs have been coming down over the last year following the crisis last year and a reduction in the energy price cap, with gas costs down 31% and electricity costs down 15.6%. However both remain higher over a two year period. Food and non-alcoholic drinks inflation eased for the seventh straight month to 10.1%, the lowest level since June 2022 with milk, cheese, eggs, yoghurt, and crisps prices falling. Restaurant and hotel prices have been coming down too.
“Prime Minister Rishi Sunak’s goal of halving inflation this year has been achieved ahead of schedule. While he is likely to claim the drop in inflation as a win for his government, it has mostly been driven by factors outside of Sunak’s control such as the drop in energy prices after last year’s spike following Russia’s invasion of Ukraine, price cuts from supermarkets, restaurants and hotels to boost demand amid the sluggish consumer backdrop, and rising interest rates from the Bank of England that have encouraged saving and deterred spending and borrowing in the economy.
“The Bank of England will be encouraged by today’s lower-than-expected inflation readings both at the headline and core levels with the central bank increasingly likely to keep rates on hold for the third consecutive time at its next decision meeting. Reflecting this expectation, the pound is under pressure today against the US dollar and the euro and the yield on the 10-year UK gilt has fallen to the lowest level since the start of June. UK housebuilders like Barratt Developments, Taylor Wimpey and Berkeley Group are trading sharply higher too amid broader gains for UK equities and growing risk appetite.
“The central bank’s 14 straight rate hikes prior to September’s pause continue to make their way through the economy. But with the Bank of England either at or very close to the peak of the rate hiking cycle, some mortgage lenders have been improving their offers with two-year fixed mortgage deals dipping below 5% for the first time in five months.”
Jill Mackay, savings specialist at Scottish Friendly: “Inflation rose like a rocket last year and has been falling more like a feather during 2023. Much to the despair of families up and down the country, it has remained remarkably sticky.
“But that situation has now changed after October’s dramatic fall in inflation. The improved figure has largely been driven by a significant slowdown in gas and electricity costs, as well as the price of food and non-alcoholic beverages.
“However, the reality for UK households is that living costs are still rising considerably.
“Heading into winter people’s energy bills will go back up and experts are predicting that the energy price cap will rise again in January. It therefore seems unlikely that inflation will continue its rapid descent and could hover around 4% or 5% mark for some time.
“We are clearly not out of the woods yet and households should keep a firm handle on their finances to mitigate the impact of any higher bills and unexpected costs. Building up a considerable savings buffer remains the priority for anyone able to do so, while for longer-term goals investing should be part of people’s thinking.”
Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs: “The sharp fall means that inflation is back on track to the Bank of England’s 2% target next year. This should slam the door on any further increases in interest rates and bring forward the timing of the first cut.
“The sharp drop also fulfils the Prime Minister’s target of halving inflation and removes at least one obstacle to tax cuts in the Autumn Statement. These are likely to focus on business taxes, with any big changes in personal taxes held back until the Budget in the Spring.
“The government will claim that inflation would have been slower to fall if it had not taken tough decisions on fiscal policy, notably on public sector pay, spending and tax. But this is debatable. The drop in inflation mainly reflects the tightening in monetary policy, the global economic slowdown, and the decline in commodity prices, rather than anything the government has done.”
Daniel Mahoney, UK Economist at Handelsbanken: “As expected, the UK’s headline rate of inflation has tumbled to well below 5% in October. Y-o-y CPI inflation fell from 6.7% in September to 4.6% in October (market expectations: 4.7%). The y-o-y core rate of inflation, which excludes food and energy, eased from 6.9% to 6.6%. Annualised goods inflation saw a major fall (6.2% to 2.2%) but, perhaps more significantly for the Bank of England, services inflation cooled from 6.9% to 6.6%. Services inflation is one of the key metrics that MPC members are currently tracking when deciding on interest rates …
“The major drop in headline inflation now brings UK inflation roughly in line with France’s, although Germany’s rate remains considerably lower. The 2.1pp drop in headline rate between September and October has mostly been driven by the base effect in energy markets. For example, while gas costs rose by 1.7% in the twelve months to September, they fell by 31% in the year to October. The electricity and gas component of y-o-y CPI alone has fallen by around 1.5pp between September and October. Other contributors to the fall include an easing in annualised food and non-alcohol prices which are now at the lowest annual rate since June 2022 …
“As mentioned yesterday, it was widely expected that headline rate would be sub 5% and the core rate would see some easing. MPC members will be re-assured that both of these expectations materialised and that the rates were, in fact, slightly below expectations.
“However, the path to 2% inflation remains challenging. The Bank of England still does not expect the UK to meet this target into well into 2025 given services inflation remains elevated and nominal wage growth continues to register at levels not consistent with this target. This release re-confirms are current view on base rates. Rates have now peaked in this cycle at 5.25% but are likely to be held at this level until the summer 2024 in order to tackle domestically-led inflationary pressures.”
James Lynch, fixed income investment manager at Aegon Asset Management: “Now that the Bank of England have paused interest rates at 5.25% at two meetings in a row, they really did need some confirmation that they are on the correct course of action and they got that this morning with the October inflation numbers.
“The BoE had a forecast of 4.8% CPI , it came in at 4.6% and more importantly services fell to 6.6% while they expected 6.9%. The big move down in inflation came from the Ofgem price cap falling in October. This contributed the most to the fall but outside of that it was also a pretty broad-based move down in most components.
“The UK inflation numbers are now not looking too out of line with the US (3.2%) and the Eurozone (2.9%), and we would expect inflation yoy rates to continue to fall into next year. The pausing of policy rates, sluggish GDP growth and inflation falling faster than expected is a pretty good backdrop for the gilt market.”
Paula Bejarano Carbo, Associate Economist, National Institute of Economic and Social Research (NIESR): “Annual CPI inflation was 4.6 per cent in October, down from 6.7 per cent in September, driven by a base effect (i.e. the large energy price increases that occurred in October 2022 ‘dropping out’ of the CPI basket this October) and further by not being replaced by ‘new inflation’.
“Core CPI fell from 6.1 per cent in September to 5.7 per cent in October, while NIESR’s trimmed-mean CPI inflation measure fell from 7.3 per cent to 6.5 per cent.
“While these measures indicate that underlying inflationary pressures are now more elevated than the headline figure, it is a good sign that they are continuing to ease.
“Though the headline figure has halved relative to last January, we still have a way to go before inflation reaches the Bank of England’s target, which, as set by the government, is to achieve a 2 per cent inflation rate. It is important to stress that control of inflation is the job of the Monetary Policy Committee of the Bank of England and not the government.
“It is largely its actions, raising interest rates, that have enabled inflation to fall in this time, alongside decreasing energy prices (given that the UK is an energy importer, this is an exogenous factor).
“It would therefore be helpful to move the narrative away from this halving objective, and back towards the 2 per cent target.”
Susannah Streeter, head of money and markets Hargreaves Lansdown: “UK inflation has made a bigger than expected jump down in its difficult descent, but it may still become stuck in the mud of viscous wage growth in the coming months.
“While this dramatic drop means inflation has hit the target promised by Rishi Sunak, its arguably not what the government has done but monetary policy driven by the Bank of England which is showing up in these figures. The impact of pent-up demand from the pandemic has dwindled and supply shocks caused by the war in Ukraine have also eased off.
“The energy price cap was cut in October, which as expected has fed directly into the figures, and the price of used cars has also fallen back. There’s also been an tailing off in the annual rate of food and non-alcoholic drink inflation. Prices rises for vegetables have eased considerably, falling from 14.4% to 10.8%.
“There is finally cheer for crisp lovers, with the snacks falling in price falling by 3.4% month on month. It’s enough to burst open a bag in celebration.
“But the party may be short-lived. At 4.6% inflation is more than double the Bank’s target and so the prospect of cuts are still a very dim and distant hope. The Bank must get to grips with stopping domestically-fuelled inflation in its tracks and with wage growth stubborn, the higher for longer mantra is being repeated. Although core inflation is heading in the right direction, falling 6.1% to 5.7%, risks remain.
“The Bank’s Chief Economist Huw Pill, speaking at the Festival of economics in Bristol said it would require ‘persistent restrictiveness’ in policy so painful borrowing costs are set to linger. However, at this stage another interest rate rise looks unlikely given the Bank will want to wait for the lag effect of previous hikes to take effect.”
Steven Cameron, Pensions Director at Aegon: “Today’s official inflation figure of 4.6%% from the Office for National Statistics shows the Government has delivered on its promise to halve inflation from its 10.7% starting point by the year end.
“It comes a day after figures show total earnings continue to increase at a rate of 7.9%. While this ‘real’ earnings growth of over 3% is good news for those of working age receiving average pay increases, it piles pressure on the Government as it weighs whether or not to honour the triple lock in full next April, with an announcement possibly made as part of the Chancellor’s Autumn Statement.
“The official formula would grant an 8.5% increase, based on year-on-year earnings growth for the May to July period. This is further above inflation than we’ve seen in recent months. With rumours of the Chancellor having more fiscal headroom than anticipated, the Government may decide to grant the full 8.5%, providing another bumper increase after this April’s highest ever 10.1%. But this is paid for out of the National Insurance of today’s workers and raises real questions around intergenerational fairness.
“There have been reports that the Government is considering adjusting the earnings growth figure downwards to take out the impact of recent one-off public sector bonuses which have created a ‘distortion’. While trimming it back to say 7.8% would save the Government hundreds of millions, it risks the wrath of the pensioner population ahead of an almost certain General Election next year.
“An 8.5% increase would see the New State Pension jump by a bumper £901.02 to £11,501.22 a year. The ‘old’ State Pension, for those who reached State Pension age before 6 April 2016, would also rise by £690.40 to £8,812.80.
“With the Government already having more than met its target of cutting inflation by half by the end of the year, the current 4.6% remains significantly above the Bank of England’s 2% target, so the headline rate may fall even further as we head into the early months of 2024. This means there’s a real chance that a State Pension increase of 8.5% could be more than double the ruling rate of inflation come next April. That’s unsustainable.
“Whatever the decision for next April, volatile price inflation and earnings growth add to growing concerns that the Triple Lock in its current form is unsustainable longer term. Prior to the General Election, we’re calling on the main parties to make clear their proposals to make it sustainable, reliable, and intergenerationally fair.”
Lindsay James, investment strategist at Quilter Investors: “The Prime Minister will be breathing a deep sigh of relief today, especially given the political events of the last few days. Halving inflation was meant to be the easiest of his five priorities to achieve as it was a year on year comparison, and 2022 saw inflation rise sharply. Although things got a little close for comfort, today’s sharp drop in inflation to 4.6% is a positive step on the long road back to target levels. However, this has been predominantly driven by factors that look unlikely to be repeated in the months ahead.
“Energy prices are the most significant contributor to the fall, with gas costs highlighted as 31% lower in the year to October 2023, and electricity costs down 15.6%. Unfortunately the loss of £400 of support from the government per household towards energy bills makes the real impact on consumers ‘cost of living’ far more modest, whilst gas prices have recently moved higher, reflecting global supply constraints, which will feed into a higher Energy Price Cap from January onwards.
“Food appears to be seeing more consistent reductions, with this the seventh month of falling annual inflation readings, supported by a trend of falling prices for domestically produced food, increased competition amongst the supermarkets, and generally lower soft commodity prices.
“Whilst this headline data will on the face of it be welcome news for the MPC, they will want to see more evidence of slowing inflation across the economy, rather than it coming primarily from fluctuations in international energy markets. With Core CPI (excluding energy, food, alcohol and tobacco) falling more gradually, now at 5.7% and down from 6.1% in September, it is clear that further progress towards the target of 2% is likely to be relatively slow.”