This morning, the ONS has released the latest UK inflation data, for the month of October showing a hike from 1.7% last month to 2.3% this month – slightly higher than had been expected. UK inflation is now above the Bank of England’s 2% target and has therefore dented hopes of further interest rate cuts this year. The main driver of this latest hike was a rise in energy bills.
Sharing their reaction to these inflation data and what it might mean for the direction of interest rates, investment strategists and economists from across the industry have been commenting as follows:
Daniel Casali, Chief Investment Strategist at wealth management firm Evelyn Partners, comments: ‘The uptick in in October’s inflation number from September was led by a 9.5% hike in energy regulator Ofgem’s price cap for the fourth quarter. While the annual figure shows that inflation has ticked back above the Bank of England’s 2% inflation target rate, it is still within the acceptable 1 to 3% latitude, and the lid on inflation remains broadly intact.
‘In the details, perhaps of most concern to the monetary policy committee is that services CPI inflation remains elevated at 5.0% year-on-year. Within services, there are still pockets of inflation in rents and a couple of new areas to watch out for where the embers of inflation could flare up. Education prices are set to jump as VAT on school fees are introduced in January, and sewage prices and vehicle excise duty could drive up services inflation from April.
‘All goods CPI inflation came in at -0.3% year-over-year, a narrowing from -1.4% in September, to reflect higher energy prices.
‘The BoE expects inflation to accelerate to a cyclical peak of 2.8% by the third quarter of 2025 before slowing to 1.8% by the end of 2027. Overall, despite some concerns about pockets of inflation, this is unlikely to stop the BoE from cutting interest rates.
‘For investors, gilt yields have adjusted upwards to reflect a potentially slower approach by the BoE in cutting interest rates. Other factors such as increased issuance post the Budget have also put upward pressure on gilt yields. Nevertheless, short-term two-year gilt yields of around 4.2% look relatively attractive given the uncertain outlook for the UK economy. ‘
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“Headline inflation was always going to pop up again given energy price effects, but the slightly larger than expected increase reported today is somewhat disappointing. In particular, services inflation, which is closely watched by policymakers as a sign of underlying inflation pressures, was stronger and still well above an inflation-target consistent rate, albeit broadly in line with the Bank of England’s forecasts. Headline inflation is likely to drift further above target for the next few months, but it is the fundamental determinants of inflation that will determine the path of interest rates from here. And with the budget set to boost growth and inflation next year, there is little reason for the Bank to deviate from its only gradual rate cutting schedule any time soon. So we continue to expect the next rate cut early next year.”
Commenting on these data, Lindsay James, investment strategist at Quilter Investors said: “Last month’s surprise fall in inflation, which left it below the Bank of England’s 2% target for the first time in over three years, has proven very short lived. This morning’s inflation figure from the ONS reveals UK inflation jumped to 2.3% in the 12 months to October 2024, up 0.6% compared to the 1.7% rise in the 12 months to September.
“Energy prices take some of the blame, after the Ofgem price cap on household bills lifted by nearly 10% last month, but other areas including the services sector have also contributed to the uptick, and the retail sector has also warned of potential inflationary pressures in the near future. Just yesterday, a group of 80 of the UK’s biggest retail bosses wrote to the Chancellor to air their concerns around the consequences of the changes announced at the budget. They warned that higher business costs, driven by increased employer national insurance contributions and the national living wage rise would need to be passed on to shoppers and could also impact employment and investment.
“Comparatively, in the US the Federal Reserve has seen an uptick in inflation which could result in a pause on rates, but growth has remained robust and is indeed at least part of the cause of this. Whereas, in the UK, the focus has been more on rising cost pressures, including uncomfortably high core inflation, while GDP prospects have barely moved.
“The Bank of England opted to cut rates again at its latest monetary policy meeting, but with inflation, wage growth and unemployment all on the rise, while stalling GDP continues to highlight the malaise the UK finds itself in, the pace of future cuts is looking much less certain. Expectations for further cuts have been scaled back considerably, with rates expected to remain above 4% throughout 2025.
“With just one more MPC meeting before year end, it is looking increasingly likely that the Bank will close out 2024 with a hold on rates. This is a clear reminder that short term inflationary pulses may return, potentially caused by factors such as obstacles to trade, labour market tightness, taxation and volatility in food and energy prices. Whether October’s uptick in inflation proves to be just a blip remains to be seen, however it seems more likely that the Bank may err on the side of caution in coming months as a growing list of inflationary risks emerge on the horizon.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said: ” October headline Inflation printed higher than consensus forecasts. Coming in at 2.3% y/y, it is 0.1pp lower than the MPC had forecast at the August Monetary Policy Report. However, things have moved on a bit since then, with Rachel Reeves’ budget and a Red Sweep in the US, leading to a significant repricing of UK Gilt yields higher. Whilst there will be upward pressure on UK inflation from an aggressive tariff policy, there will also be a negative growth impulse, so with only two 25bps cuts priced by the middle of next year and another one by the end of 2025, we feel that bond yields look attractive into 2025.“
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services sees the pace of future rate cuts slowing as he comments: “Today’s data confirms that UK consumer prices rose above 2% in October, following a dip in September. This should come as no surprise given the 10% rise in Ofgem’s price cap. Despite this, the increase in energy prices has been partially offset by a drop in petrol and food costs, yielding a more subdued rise in inflation.
“Today’s data will undoubtedly be subject to scrutiny ahead of the Monetary Policy Committee taking its final rate decision of the year, which will be considered alongside November’s numbers in December. Core inflation inched upwards to 3.3%, and inflation in the service sector, rose to 5%, both above City expectations. The Bank of England will be wary following these increases in inflationary pressures, making chances of a rate cut in December less likely. November’s data, which may weigh more heavily on the rate-setting Committee’s decision, will be released the day before its announcement next month.
“In his Mansion House speech last week, Bank of England Governor Andrew Bailey addressed the importance of carefully timing future rate cuts. As a result, financial markets ascribed a mere 20% chance of a 0.25%-point cut before Christmas. It’s yet too early to determine the impact of Rachel Reeves’ Budget measures on inflation, but what is likely is that the Bank will adjust interest rates only at a very gradual pace in the foreseeable future.”
George Lagarias, Chief Economist at Forvis Mazars said: ““More bills, less fun” was literally the message from the October inflation print. Prices rose across most categories, save “recreation and culture”. While the final figure, 2.3%, was very close to expectations, it still marks the official end of inflation coming down on previous dynamics. New initiatives will have to be undertaken if headline inflation is to stabilise around or below 2%, at a time when the Bank of England is more concerned about growth and has entered a rate cut trajectory. We think it is very unlikely that the BoE will cut rates in December, especially after this release, and we wouldn’t be surprised to see rate expectations for the end of 2025 tilting on the upside again.”
Commenting on the latest CPI data from the ONS, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said: “Like an unwanted sequel, inflation is back. The annual consumer price index, according to the ONS, rose from 1.7% in September to 2.3% in October. Though unwelcome, this rise was expected with a 10% increase in energy price cap, in addition to higher gas prices. Services inflation was higher than expected at 5% – this is an important input in the decision-making process for the Bank of England when deciding about the future trajectory of interest rates, given that UK is primarily a service driven economy.
“In general, service inflation has proved to be stickier and is expected to hover around this mark for a bit longer. This latest reading of the price gauge reduces the chances of a pre-Christmas rate cut. While the Bank has already signalled its intent on taking a gradual approach to cutting interest rates, it will be even more cautious in its approach as it waits for the policies laid out in the October Budget to take hold. There are endless debates as to what the real impact is going to be but what matters more is the consumer and what he or she perceives these impacts to be. Should the consumer feel embattled, the path to recovery and growth could possibly be an especially arduous one.”
