The ONS has announced this morning that UK inflation has dropped to 1.7% for the year to September, down from 2.2% in August – beating most analysts’ expectations. UK inflation is now below the Bank of England’s target rate for the first time in 3 years. Even core inflation – which has been causing some concerns amongst policy makers – has fallen to 3.2% from 3.6% last month. Overall, this will be seen as some welcome good news although it is just a snapshot in time and may not be sustainable at this level given recent rises in fuel costs.
But with that good news in mind, what do these inflation data mean for the direction of interest rates? Will it mean the Bank of England is more likely to cut again next month? And what about markets and the economy? Investment strategists and fund managers have been early to their desks today and sharing their reaction to the data as follows:
Lindsay James, investment strategist at Quilter Investors said: “For the first time in more than three years inflation is back below the Bank of England’s 2% target. With inflation falling below this level and the pace of wage growth slowing, the conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too. This will please the government in the run up to the hotly anticipated budget, where we are being repeatedly told tough decisions are to be announced, so any sliver of good economic news will likely be pounced upon.
“Core inflation has fallen too, with the annual figure now standing at 3.2%. It continues to be much more stubborn than its CPI counterpart, but it is ultimately the more important factor in whether there is just one more interest rate cut this year or two. Andrew Bailey has said the BoE could get more aggressive with its cuts to interest rates if inflation continues to fall, but with bond yields rising again and a tricky budget to navigate, the market can’t currently decide on the direction of travel. The latest data may just give them their answer.
“Public sector pay deals are likely to slow core inflation’s march downwards, and there are other factors which will push inflation back up towards the end of the year, such as the rise in the energy price cap, so today’s data should be viewed in the wider context. Whether it rises enough to put a brake on two more rate cuts in 2024 or just the one remains to be seen, but for now the government and the BoE will be very pleased with the numbers out this morning.
“Today’s figure also confirms the state pension is to rise by 4.1% in 2025 as inflation has come in well below the increase in average wage growth. This means the triple lock mechanism has kicked into gear and given pensioners an above inflation income rise. The good news for them is that it means a rise of up to £473 a year from their state pension income – welcome relief given the loss of the £300 winter fuel allowance and cost of living payments that are now withdrawn. While it will provide some respite, it will not prevent hundreds of thousands being negatively impacted given those losses at a time when energy bills are on the up again.
“For government, while lower inflation will be welcomed, the confirmed rise in the state pension is another kick in the teeth at a crucial juncture. Wage growth was revised upwards on Tuesday, resulting in a higher inflation busting state pension rise than was first predicted, one that the government could ill afford at a time of stretched public finances. With the state pension likely to be of equal value to the personal allowance in the coming years and the fact we have an aging population, how long the triple lock can remain sustainable for remains to be seen.”
Rob Clarry, investment strategist at wealth management firm Evelyn Partners, comments: “Not only did the annual inflation rate for September come in substantially lower than expectations, but there was a notable drawback in key services inflation. Bank of England Governor Andrew Bailey said earlier this month that the MPC could be a “bit more aggressive” with rate cuts, and together with some softening labour market data this week, the evidence has emerged to put this sentiment into action.
“For some time now the UK has appeared to be facing stickier inflationary pressures when compared with other advanced economies. The bond market has been particularly concerned with comparatively high core CPI readings, and also with services inflation, which has been running above 5% since June 2022. These measures are a better gauge of domestically generated inflation than the headline CPI measure, which is more influenced by external factors such as global energy prices.
“So this CPI print will have been welcomed by both the bond market and the Bank of England. Core inflation decelerated from 3.6 year-on-year to 3.2%, while services inflation fell sharply from 5.6% to 4.9%. The largest downward contribution to the monthly change in the CPI annual rate came from transport, with larger negative contributions from air fares and motor fuels; the largest offsetting upward contribution came from food and non-alcoholic beverages.
“We also received the latest UK labour market data this week, which pointed to further softening in the jobs market. Wage growth continued to decelerate while the number of job vacancies declined from 856,000 in the three months to August to 841,000 in the three months to September.
“Coupled with this encouraging inflation data, the MPC surely now has the evidence it needs to take Andrew Bailey at his word and be more aggressive in its rate cutting cycle. The only possible caveat to this narrative is that headline inflation is likely to move higher again in the coming months given that the energy price cap increased by 10% on the 1st October.
“Nevertheless, money markets are now expecting quarter-point cuts at the next three MPC meetings, and the pound sold off this morning in response.”
September’s UK inflation figures are as good as it will get says Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, commenting: “This morning’s data confirms that after inching slightly above the Bank of England’s 2% target for the last two months, inflationary pressures fell safely within the desired parameters to mark the start of autumn. This was aided by the end of the summer holidays, eliminating economic volatility in services such as airfares, as well as falling petrol prices.
“The Monetary Policy Committee (MPC) will be relieved that its commitment to a high base rate has succeeded in reversing inflation. The Bank’s rate setters will not see new inflation data before their next decision in a few weeks. However, higher oil prices due to the conflict in the Middle East and Ofgem’s 10% price hike suggest that September’s dip in inflation may not be maintained. As such, September’s low inflation figures may be the best we’re going to see.
“Potential slight upticks in inflation should not impact prospects of a lower base rate, though rate decreases will likely be restrained over the coming months. The next rate decision will come one week after the Chancellor’s Budget announcement. While the MPC will need to digest the implications of the Chancellor’s policy announcements, all signs indicate that a patient approach to interest rate setting will be the most prudent course of action.”
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“This is a very encouraging inflation report for the Bank of England. In particular, the sharp fall in services inflation will help reassure policymakers that underlying inflation pressures are fading, even if the headline rate is likely to pick-up again before the end of the year. A 25bps rate cut in November is now effectively a done deal, and this report certainly makes the path to a consecutive cut in December much clearer. However, the Bank will probably want to assess the impact of the Budget before signalling a shift to a more rapid pace of easing.”
Commenting on the latest CPI data from the ONS, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“At last, some good news for the beleaguered consumer. Inflation, as measured by the Consumer Price Index, fell below the Bank of England target to 1.7% in 3 years. Better still, the print came in lower than was expected by practitioners. The downward move was from transport, fuelled by lower air fare and petrol prices. At the back of a cynic’s mind, is also the Middle East crisis, which has caused crude prices to rise as well as the rise in the Ofgem energy price cap rise for households – these have a potential to reverse the decline in inflation.
“Notwithstanding, this comes as a welcome boost to both consumers as well as the Government as it heads into its Budget, promising to do everything to “galvanise growth”. The Bank of England also gets a bit of a breathing room allowing it to take steps to begin the easing cycle in earnest. With the possibility of a rate cut by the Central Bank in November almost a certainty, it would not be too much of a leap of faith to expect another in December, should the trend in inflation continue.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said: “That’s a big fall in Services inflation, below consensus estimates. Along with the easing of private sector wage growth yesterday, it’ll please the Bank of England. The market was already pretty convinced of a 25bps cut at the next meeting in November anyway. However, with Services inflation still running well above long-run averages, we’ll need to see an acceleration of the trend, or an exogenous market shock for the BoE to follow up with another cut in December. There isn’t a shortage of potential shocks right now though, with a much-anticipated budget, a close US election and ongoing elevated geopolitical risks.“
Ed Monk, associate director, Fidelity International shares his comments about inflation slowing faster than expected below 2% BoE target: “The dip in inflation confirmed today suggests a November cut to interest rates is likely, with the question now whether borrowers can look forward to another one after that before the year is out.
“Ahead of the inflation numbers this morning the bond market was pricing in three to four quarter-point cuts before the end of next year, but that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.
“Lower inflation is good news for household budgets but also for savers and investors, who will see a higher inflation-adjusted return. Fund purchases by our clients demonstrate the appetite for cash and cash line assets, with cash and shirt-maturity bond fuds featuring high in Fidelity’s list of best-sellers this year. Inflation-beating interest on cash will no doubt have tempted some investors to move money from investments into savings accounts. The good news for those savers is that rates are likely to exceed inflation for a while longer. Market prices suggest this will be the case for all of next year, at least.
“But there’s also clear signs that the path for rates – including cash interest – is falling. In that context, it may be time for investors to rebalance their allocation of cash versus investments.”
Aaron Hussein, global market strategist at J.P. Morgan Asset Management comments: ‘Today’s inflation print will reassure members of the Monetary Policy Committee that the tide is turning in the battle against inflation. Both headline and core inflation came in below expectations. Headline inflation fell to 1.7% year on year, while core inflation – a better measure of domestically generated inflation – moderated to 3.2%. This, coupled with yesterday’s further moderation in wage growth, suggests that the Bank is gradually taming the inflation tiger.
‘However, against a backdrop of solid activity, a tight labour market, and resilient nominal wage growth, there’s a risk that cutting too quickly could reinflate the inflation balloon. Thus, while a November cut seems highly likely, this cutting cycle is still set to be gradual absent a shock to growth. A quarterly cadence of cuts appears most likely. Investors expecting the Bank to keep pace with its peers around the world are therefore likely to be disappointed.’
James Lynch, fixed income investment manager at Aegon Asset Management said: “Inflation in the UK has just printed at 1.68% against the Bank of England’s expectation of 2.1%. This is a big miss.
“Driven mostly by services, in particular airline prices were low (payback for previous high months) as well as the hospitality sector, but it does look pretty broad based and not due to a lot of ‘one off’ factors that we sometimes get.
“The market had not been paying attention lately to inflation numbers, it had been more focused on activity data and the labour market data and in the UK in particular the upcoming budget. The sudden fall in inflation here in the UK and globally has taken some by surprise. The headline numbers are now quite stark, UK is 1.7%, Eurozone 1.8%, Canada 1.6%, Sweden 1.6%, Switzerland 0.8%, China 0.4%. The one major region that is still above target is the US at 2.4% CPI which is due to housing (lagging indicator that is set to fall further).
“We are seeing negative goods price inflation globally (deflation), supply chains continue to ease, demand is low, inventory is high and China is slowing and exporting at cheaper prices to maintain market share. Services inflation had been keeping headline inflation high, but we are now starting to see this fall. If services continue to fall back to pre-pandemic levels and there is good reason to think it does, then sub target inflation numbers could be here to stay over the medium term.
“For policy implication in the near term, I would expect the market to price 25bps cuts at the next 3 meetings, it will be hard for the hawks to maintain the line that they continue to be worried about the persistence of inflation.”
