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Inflation Cools More Than Expected in October, Offering Relief to UK Economy and BoE

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UK Inflation Cools More Than Expected, Offering Relief to Bank of England and Prime Minister

British inflation has cooled more than anticipated in October, providing relief to the Bank of England (BoE) and Prime Minister Rishi Sunak. The drop in annual consumer price inflation to 4.6% from 6.7% in September was the smallest increase in two years, causing investors to increase their bets on BoE rate cuts in 2023.

The Office for National Statistics (ONS) stated that the decrease in the annual CPI rate was the largest decline from one month to another since April 1992. This news prompted a slight fall in sterling against the dollar, while the FTSE 100 rose over 1%, reaching its highest level in almost a month.

The BoE’s forecasts and a Reuters poll of economists had predicted an October reading of 4.8%, indicating that inflation cooled more than anticipated. Despite this, the BoE has cautioned that the final stage of reducing inflation will be challenging. The central bank projects a return to its 2% target in late 2025, although many economists believe it will happen sooner.

The decline in inflation figures also reinforced expectations that the BoE’s hiking cycle has ended, echoing the U.S. Federal Reserve and European Central Bank, which have seemingly reached the peak for interest rates. Julien Lafargue, chief market strategist at Barclays Private Bank, stated that the road ahead for the UK economy will likely continue to be uncertain, predicting no BoE rate changes for several months.

Core inflation, excluding energy and food prices, fell to 5.7% from 6.1%, while service sector inflation dropped more than expected to 6.6% from 6.9%.

Prime Minister Rishi Sunak claimed victory, stating, “In January, I made halving inflation this year my top priority. Today, we have delivered on that pledge.” Sunak had promised to halve price growth before an expected 2024 election. However, the National Institute of Economic and Social Research (NIESR) highlighted that the BoE’s interest rate hikes and energy price movements were the reasons for the drop in inflation, suggesting that it was not the government’s responsibility to control inflation.

Despite the significant decline in inflation last month, Britain still retains the highest rate of consumer price growth among the Group of Seven nations, narrowly above France’s 4.5%. Italy is expected to publish an updated estimate for October later today.

Consumer prices in Britain have increased by 21% since the end of 2020, making it the worst record in Western Europe. In line with weaker-than-expected U.S. inflation data, investors have increased their bets on BoE rate cuts next year, with three 25-basis-point reductions in Bank Rate almost fully priced in by December 2024, and the first cut fully expected in June. BoE Chief Economist Huw Pill stressed on Tuesday that the expected fall in inflation to just under 5% would still leave it “much too high.”

While the case against further rate hikes is becoming increasingly clear, more evidence will be required before rate cuts can be considered, according to Hugh Gimber, global market strategist at J.P. Morgan Asset Management. The tightness of the labor market remains a key concern.

Finance Minister Jeremy Hunt is expected to offer investment incentives to businesses in a budget update on November 22.

More detail via Kitco.com here… ( Image via Kitco.com )

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