UK inflation rises, but only marginally more than expected

Price growth in the UK surprised to the upside in October, with headline CPI growing by 2.3% YoY. This leaves inflation tracking above both market expectations and Bank staff forecasts, both of which anticipated a reading of 2.2%.

Even so, we think this should have minimal impact on MPC thinking. Indications at yesterday’s Treasury Select Committee suggested that cutting once per quarter is base case for the MPC, and there is little in today’s data to steer policymakers away from that course of action. Indeed, a price growth uptick was universally expected in October due to energy base effects, and the deviation relative to forecast is small.

We continue to expect the BoE to hold rates in December, before easing again in February 2025.

Looking through the detail of today’s CPI report, largely supports this view. While not huge, this latest inflation overshoot was relatively broad-based, but with no obvious signs for concern. Admittedly, core CPI rose by 3.3% last month, 0.2pp above market expectations, mostly attributable to higher-than-expected core goods prices. Services CPI, however, which markets had expected to stabilise at 4.9% YoY, grew by 5.0% in October – in line with Bank staff forecasts.

As anticipated, the major upside contributor to October’s rise in price growth came from energy costs.

The price of energy gas and other fuels fell by -7.1% in the 12 months to October, a sharp uptick from the -20.7% decrease seen in the September reading. Perhaps unsurprisingly then, housing and household services inflation, which includes energy costs, posted the largest rise of any subindex in October, adding 0.59pp to YoY CPI growth. Interestingly though, this was offset to some extent by a 0.11pp drag from recreation and culture last month. This latter component is, along with the cost of restaurants and hotels which were little changed in October, highly sensitive to discretionary consumer spending. If sustained moving forward, this would be suggestive that slowing household demand, perhaps due to concerns around the recent UK budget, could offset the otherwise inflationary impact of recent fiscal announcements.

All told then, we see little reason to overreact to today’s inflation uptick. The rise in price growth was largely as expected, and broadly consistent with BoE forecasts.

With this in mind, OIS implied easing expectations now look a little too slow in our eyes. A full cut to Bank Rate is only anticipated by the end of Q1 2025. We think this will come a little earlier, which poses some modest downside risk to sterling. For now though, the range of macro drivers that could catalyse such a move looks limited, which barring any surprises, should leave the pound at the mercy of external events through the Christmas period.

Author: 

Nick Rees, Senior FX Market Analyst

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