The ONS has announced today that for the month of November, UK inflation has risen to 2.6%. The rise, which was up from 2.3% for October, was broadly in line with expectations and had rising prices of fuel and clothing as the main culprits behind this latest hike. It takes inflation to the highest level for 8 months and creeping ever further from the Bank of England’s 2% target level.
While the cost of living pressures look set to remain, the key question on wealth managers minds is what will these data mean for the Bank of England’s Monetary Policy Committee as they ponder whether to change the level of UK base rates ahead of the announcement at midday tomorrow?
Investment strategists and wealth managers have been sharing their analysis and reaction to the latest inflation data with us, as well as their expectations of what it means for tomorrow’s base rate decision, for markets and the wider economy as we go into 2025:
Commenting on the inflation data, Lindsay James, investment strategist at Quilter Investors said: “The latest inflation data shows the headline figure ticking up from 2.3% to 2.6% year-on-year, broadly in line with expectations. However, the month-on-month rate came in at just 0.1%, a marked slowdown from the 0.6% figure seen last month when the Energy Price Cap hike pushed prices higher. This suggests the year-on-year rise is less about a resurgence in inflationary pressures and more a reflection of base effects from the previous year.
“The Bank of England has consistently warned that inflation could face upward pressure towards the end of this year before falling more sustainably in 2025, as it laps the steep fall in energy prices that occurred in mid-2023. In reality, inflation has been less pronounced than anticipated, with goods inflation remaining muted as oil prices have weakened further.
“Service inflation, however, continues to be the main challenge. But looking ahead, there are reasons to be optimistic that it can be brought under control. Labour market data indicates a softening in vacancies, with the estimated number of vacancies in the UK falling to 818,000 in September to November 2024 – a decrease of 31,000, or 3.7%, compared to the previous quarter. This trend, combined with higher National Insurance costs for employers, is expected to bring wage inflation back towards 2-3%. While slower wage growth may be unwelcome news for workers, given wages account for around 60% of costs in a typical service sector business, it will help headline inflation return closer to the Bank’s 2% target.
“If these trends persist, it could pave the way for rate cuts in the UK next year. Markets currently expect just over two 0.25% cuts by the end of 2025, a far more cautious outlook compared to the ECB, where rates are forecast to be reduced between four and five times over the same period.”
Tom Stevenson, investment director at Fidelity International, said: ‘A second consecutive rise in inflation is unwelcome, if not unexpected, news. Combined with the recent stalling in growth, it paints a picture of a UK economy battling to escape the clutches of stagflation.
‘The Bank of England will feel less inclined to add to its rate cuts in August and November as the monetary policy committee meets this week for the last time in 2024. The UK appears to be falling behind other central banks as they continue to lower the cost of borrowing.
‘Stronger food, clothing and fuel costs were part of a broad-based rise in prices. Goods inflation turned positive after a string of falls and service sector inflation remains well above target. Added to firmer inflation expectations in the wake of Rachel Reeves’s first Budget, the new data adds to the government’s dilemma as it seeks to boost growth in an economy that has stopped expanding since the election.
‘The UK stock market remains one of the cheapest in the developed world, but the lack of domestic growth and persistent inflation makes it harder to spot the catalyst for a re-rating.’
Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners, comments: “With this reading, CPI inflation is currently running slightly ahead of the 2.4% BoE forecast for the fourth quarter of 2024. In the data, services CPI inflation remains elevated at 5.0% year-over-year. Within services, there are still pockets of inflation, like rents in the housing category, which are running north of 7% per year.
“The uptick in annual and core inflation from the previous month makes it unlikely the Bank of England (BoE) will cut interest rates tomorrow. The monetary policy committee will be wary that services inflation becomes stuck at an elevated level and particularly after this week’s release of the October higher-than-expected average hourly earnings data, which is correlated to services inflation.
“Outside of services, goods inflation came in at 0.4% year-on-year in October and remains a drag on the overall rate of inflation.
“Looking further on, the UK inflation trajectory will be complicated by the demand boost from the Budget at the end of October after the Government relaxed fiscal rules. The hike in the National Minimum Wage and Employers National Insurance (both from April) and their impact on encouraging producers to raise prices to maintain profit margins is another consideration for the BoE.
“Stubborn inflation may lead the BoE into a more modest rate-cutting cycle. So, it looks like it will skip the opportunity to cut interest rates tomorrow and it’s probable that the next BoE interest rate cuts will come at the 6 February and 8 May BoE meetings.”
Danni Hewson, AJ Bell head of financial analysis, comments
“Households really won’t care that at 2.6% inflation is significantly lower than that the levels we all experienced at the height of the cost-of-living crisis, all they’ll really care about is that prices are still rising faster than any of us would like.
“It means less money in our pockets and even with average wage growth still nicely overshooting that figure, cumulatively we’re all still reeling from the impact the last couple of years has had on our finances.
“Whilst prices do naturally rise and fall, meaning the increases in fuel and clothing costs aren’t really cause for specific concern, it’s the stickiness of service sector inflation that will be drawing the attention of Bank of England rate setters who are about to make their last decision of 2024.
“Even before today’s CPI data and yesterday’s wage data markets had already priced out a December cut which had seemed almost inevitable back in the early autumn. What’s changed is where markets expect rates will go in 2025.
“A few weeks ago, Andrew Bailey suggested that four cuts looked likely over the next 12 months, taking the base rate from 4.75% to 3.75%. Looking today more than a third believe it will take until the August meeting for the MPC to pull out two quarter percentage point cuts.
“Higher for longer borrowing costs are just another potential pitfall businesses are having to factor into their planning, and higher for longer rates aren’t exactly the best medicine for supercharged economic growth.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments:
“Inflation ticked up, as forecasted. The odds of a cut from the MPC on Thursday had fallen recently anyway, particularly following on from the labour market data earlier in the week. This dataset won’t turn that around. The MPC will most likely vote 8-1 in favour of unchanged policy and then reconvene in early February after another round of data.”
According to Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, “Today’s data shows that inflation edged further away from the Bank of England’s 2% target last month, checking in at 2.6% for November. Having fallen to just 1.7% back in September, the strengthening inflationary pressures will dismay rate-setters ahead of their meeting tomorrow.
“The latest uptick was largely driven by unusually weak inflation in fuel and underlying goods prices in November 2023 dropping out of the annualised calculation. Last month, higher fuel prices, combined with price increases in clothing, second-hand cars and recreation, also helped to drive inflation up. Meanwhile services prices, which are closely watched by the Bank of England, rose to 5%. In its quarterly reforecast, the Bank of England had anticipated that service sector prices would increase by 4.9% last month. Today’s higher than expected outcome is likely to set the seal on no rate cut at tomorrow’s Monetary Policy Committee (MPC) meeting.
“More importantly for financial markets, which have long since given up on the chances of a lower base rate to end the year, today’s data is likely to uphold the MPC’s articulated support for only very gradual rate cuts over 2025. Given the weak economy, the Bank will likely be minded to provide a helping hand where possible. But rate-setters will only do so if inflationary pressures dissipate sufficiently to allow policy loosening without rekindling inflationary fires.”
Inflationary bells are ringing says Jeff Brummette, Chief Investment Officer at Oakglen Wealth, as he reacts to the data saying:
“The inflation bells are ringing with today’s CPI data confirming expectations of a slight uptick following the previous jump in October.
“It remains unlikely that today’s inflation figures alone will sway Bank of England rate-setters tomorrow. Markets are not anticipating another cut this year and Monetary Policy Committee members have not gone out of their way to reset these expectations during recent speeches.
“Looking ahead, Governor Andrew Bailey has said he needs to monitor how the economy responds to the UK Chancellor’s 30 October budget once it takes effect in April. Businesses may increase prices to cover the added National Insurance contributions while the overall increase in government spending could impact inflation too. We expect markets will be happy if inflation stays in 2-3% range next year, but if it were to inch higher the central bank could find itself back on a rate-hike footing.”
