News & Analysis

Headline inflation in the UK jumped a full percentage point from 10.1% to 11.1% in October, primarily due to the upwards revision in the Ofgem default energy cap from an average of £1,971 to £2,500 per year for households.

With the increase in energy costs known in advance to economists, expectations were adjusted accordingly and yet today’s print still exceeded the median projection by 0.4 percentage points. The surprise largely came from core components, where unlike in North America disinflationary forces are yet to be seen as the dominant factor. Core CPI held steady at 6.5% YoY after a  0.7% increase on the month offset growing base effects in the annual figure. Despite concerning signs for the consumer, financial markets largely looked through today’s data release as the Bank of England projected headline inflation would pick up to around 11% in Q4 at the start of the month when it took the decision to raise rates by 75bps to 3%.

With the energy price guarantee set to mitigate the impact of rising energy costs on the CPI figure over the remaining months of Q4, large base effects for core products set to take effect on the annualised figure, and growth likely to weigh on firms ability to continue raising prices in some core goods and services, headline inflation is likely to fall back to and even below 11% in November and December.

The main contributions to the increase in headline CPI came from housing and household services (+0.93pp) and food and non-alcoholic beverages (+0.18pp). Outside of these products, the contributions were largely limited, although monthly increases in prices remained fairly broad-based. Only transport (-0.23pp), education (-0.05pp) and clothing and footwear (-0.02pp). The more worrying signs for the BoE isn’t necessarily the headline figure, which they expected to rise to around 11% as stated above, but instead the fact that disinflationary factors are yet to be as prominent in core products, especially core goods, as has been seen in North America: only 21 of the 59 core CPI components printed monthly price gains lower than 0.2%. Outside of core components, the sequential pace of price increases in food products remains an area of concern amidst the cost-of-living crisis. Food CPI rose from 14.8% to 16.5% YoY in October following a 2% MoM increase.

Major food categories, such as fish, oils and fats, and fruit and vegetables all recorded gains in excess of 2.5% MoM, with just meat prices (+1.2%) and cereals (+0.9%) undershooting the overall 2% monthly gain.

For sterling, today’s release had a very limited impact. While this is primarily due to the CPI data falling in line with the BoE’s expectations, the overall shift in cross-asset risk conditions due overnight also means focus for GBP traders is outside of UK specific developments at present.

Headline inflation in the UK rises to levels last seen in 1981



Simon Harvey, Head of FX Analysis
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