Economic Implications and Policy Debates Surround Unexpected Inflation Rate
In an unexpected turn of events, British consumer price inflation (CPI) held steady at 6.7% in September, retaining its position as the highest among major advanced economies. This development keeps alive the possibility of another increase in interest rates, according to data from the Office for National Statistics.
The main contributor to this inflation figure was a rise in petrol prices between August and September, as reported by the Office for National Statistics. Notably, two other significant metrics closely monitored by the Bank of England (BoE), core inflation, and services prices, also displayed resilience, raising concerns among policymakers regarding potential long-term price pressures.
Commenting on this persistence of high inflation, Ian Stewart, chief economist at Deloitte, stated, “Progress in bringing inflation down is proving slow.” He further suggested that interest rates are likely to remain close to current levels for a significant part of the upcoming year.
Financial markets reacted to this data with sterling gaining strength and British government bond prices falling. Market analysts assess that another rate increase by the BoE is increasingly likely, although the timing remains uncertain. The central bank will announce its next decision on November 2.
Despite the surprise of sustained high inflation, several economists do not anticipate an immediate return to the BoE’s rate-tightening cycle, given that September’s inflation rate remains below the BoE’s early August forecast.
Morgan Stanley economist Bruna Skarica expects the MPC to stay on hold this year but anticipates gradual rate cuts starting in May 2024 or shortly thereafter.
UK inflation rate remains at 6.7% in September https://t.co/j1PQb3LSts
— BBC News (UK) (@BBCNews) October 18, 2023
The BoE’s previous decision to maintain interest rates in September marked the first time it did so since initiating its tightening cycle in December 2021, influenced by a surprise drop in inflation in August and other economic indicators.
Huw Pill, the central bank’s chief economist, has characterized the question of further rate increases as “finely balanced,” and Governor Andrew Bailey has predicted that future votes will be closely contested, following the 5-4 split in September.
The persistently high inflation is a matter of concern for the British government as well. Prime Minister Rishi Sunak pledged in January to halve inflation, with many households experiencing a decline in their standard of living due to wages struggling to keep pace with rising prices. Food prices, in particular, increased by 12.1% in September compared to the previous year, affecting many lower-income households.
As the data shows, consumer prices in Britain have risen by 17% in the past two years, a significant increase that would typically take almost a decade to reach.
While core inflation dipped less than expected to 6.1% in September from August’s 6.2%, services price inflation, a crucial component studied by the BoE to understand the impact of rising labor costs on consumers, increased to 6.9% in September, driven by more expensive hotel accommodations.
Yet again the UK has the highest inflation in the G7. A year after Truss, the Tories are still the biggest threat to the economy
UK inflation unexpectedly holds steady at 6.7% amid rising fuel prices https://t.co/7kPoSGo1fQ
— Chris Bryant (@RhonddaBryant) October 18, 2023
Prices charged by manufacturers, considered a valuable indicator of future inflation by some BoE policymakers, saw a slight annual decrease of 0.1% in September, following a 0.5% annual drop in August.
The raw data for the headline CPI came very close to reporting an inflation rate of 6.6%, in line with economists’ expectations of a 6.6% rate.
The previous peak of CPI was recorded at 11.1% in October 2022, primarily due to rising European energy prices triggered by Russia’s invasion of Ukraine, alongside challenges posed by supply chain disruptions and labor shortages stemming from the COVID-19 pandemic. September’s rate of 6.7% marks the joint-lowest level, tied with August, since the events of the Russian invasion in February 2022.
In its August forecasts, the BoE projected that inflation would remain above its 2% target until early 2025. However, many economists anticipate a significant drop in CPI for October, as household energy bills will no longer be compared against the much lower prices from the previous year before a substantial increase in regulated tariffs in October 2022.
Dutch bank ING forecasts that British inflation will decrease to 5% or lower in October and remain around that level for the remainder of the year, assuming no significant further rise in oil prices.