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UK Inflation Remains at 6.7% in September, Keeping Possibility of Interest Rate Rise Alive

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Consumer Price Inflation in UK Remains High at 6.7% in September

Consumer price inflation (CPI) in the UK unexpectedly held at 6.7% in September, according to the Office for National Statistics (ONS). This figure, which is the highest among major advanced economies, has raised concerns about the possibility of another rise in interest rates. The main factor preventing a decline in the annual rate was the increase in petrol prices between August and September.

While the headline inflation figure remained high, two other measures closely monitored by the Bank of England (BoE) – core inflation and services prices – also remained robust. This has led some policymakers to worry about longer-term price pressures. Ian Stewart, chief economist at accountancy firm Deloitte, noted that progress in bringing down inflation has been slow. He added that the persistence of underlying inflation and service price pressures suggest that interest rates are likely to remain close to current levels for much of the next year.

Following the release of the data, the sterling rose and British government bond prices fell. Financial markets interpreted the figures as an indication that another rate rise by the BoE is more likely than not, although it may not occur as soon as November 2, when the central bank announces its next decision.

Despite the fact that September’s inflation data falls below the BoE’s forecast in early August, some economists believe that it was not surprising enough to prompt the Monetary Policy Committee (MPC) to resume its rate-tightening cycle. Morgan Stanley economist Bruna Skarica expects the MPC to remain on hold this year, but to push back against any rapid cuts. She predicts rate cuts to begin in May 2024 or slightly later.

Last month, the BoE kept interest rates on hold for the first time since it began its tightening cycle in December 2021. This decision followed an unexpected decline in inflation in August and weaker economic data. Huw Pill, the central bank’s chief economist, stated last week that the question of further rate rises is “finely balanced,” and Governor Andrew Bailey predicted that future votes would be “tight,” following the 5-4 split in September.

Inflation is also a concern for the UK government, as Prime Minister Rishi Sunak pledged in January to halve it. Many households have experienced a decline in their standard of living due to wages struggling to keep up with rising prices. Food prices, particularly worrying for lower-income households, were 12.1% higher in September compared to the previous year.

Finance Minister Jeremy Hunt expressed optimism, stating that inflation rarely falls in a straight line. He added that as long as the government sticks to their plan, they expect inflation to continue falling this year.

The data from September showed that core inflation fell slightly to 6.1% from August’s 6.2%. This measure excludes volatile prices of food, energy, alcohol, and tobacco, making it a better indicator of longer-term price trends. Meanwhile, services price inflation, another component of CPI that the BoE studies to assess the impact of rising domestic labor costs on consumers, increased to 6.9% in September from 6.8%. This increase was driven by a rise in the cost of hotel rooms.

Prices charged by manufacturers, which some BoE policymakers consider an indicator of future inflation, fell by 0.1% in September compared to the previous year. This follows a 0.5% annual drop in August.

The raw data for the headline CPI came close to giving an inflation reading that would have rounded down to the 6.6% rate expected by economists polled by Reuters.

In October 2022, CPI reached a 41-year high of 11.1% due to soaring European energy prices resulting from Russia’s invasion of Ukraine. This, coupled with supply chain difficulties and labor shortages caused by the COVID-19 pandemic, added to inflationary pressures. The September rate of 6.7% is the joint-lowest since the Russian invasion in February 2022.

In its latest forecasts in August, the BoE predicted that inflation would remain above its 2% target until early 2025. However, many economists anticipate a significant drop in CPI in October, as household energy bills will no longer be compared against the lower prices from the previous year, following a substantial rise in regulated tariffs in October 2022.

Dutch bank ING forecasts that British inflation will drop to 5% or lower in October and remain near that level for the rest of the year, assuming there are no significant further increases in oil prices.

More detail via The Globe and Mail here… ( Image via The Globe and Mail )

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