For once, there’s some relatively good economic news as the Office for National Statistics (ONS) has today announced the UK CPI inflation data showing that year on year prices have risen by 6.7% in the year to August. The all important core inflation data also came in lower than expected at 6.2% compared to 6.9% last month. These latest UK inflation figures have surprised markets which were generally expecting inflation to be higher.
Clearly, the data have implications for tomorrow’s Bank of England MPC meeting, and the interest rate decision they come to. Consensus has been that a 0.25% rise was almost a dead cert – but will that change now? Especially as the oil price is continuing to rise?
Investment and economics experts have been sharing their views on the latest inflation data and what it means for tomorrow’s interest rate decision with Wealth DFM as follows:
Sebastian Vismara, financial economist at BNY Mellon Investment Management comments: “The unexpected fall in UK headline CPI inflation from 6.8% in July to 6.7% in August (vs BoE and consensus at 7.1%) will be of great comfort for the Bank of England. Most importantly, core CPI inflation fell even more sharply from 6.9% to 6.2% (consensus 6.8%), and services inflation declined from 7.4% to 6.8% (vs BoE at 7.2%). The BoE sees the latter as key to judge the persistence of domestic price pressures.
“We think the BoE will still hike interest rates by a further 25bps to 5.50% tomorrow. This could be the last hike given the recent loosening in the labour market and weakening in activity, but we think that risks for rates remain to the upside in the near term. UK wage growth data keeps surprising to the upside relative than the Bank’s forecasts, and core inflation remains high and has been very sticky, at least until recently. Energy prices have surged in the past few months and could increase further. The global economy has been weakening since the last quarter, but not by enough to create much slack. In other words, there remains the risk that this easing in core inflation proves to be another false dawn, and that today’s fall stalls or even reverses in the coming months. The BoE is likely to want to see broader disinflation trends in play before ending its hiking cycle.”
Luke Bartholomew, senior economist, abrdn, said:
“Today’s inflation data means the Bank of England’s policy decision tomorrow looks like a very close call. With activity data having deteriorated recently and now signs that underlying inflation has turned a corner, it is clear that past monetary tightening is now biting in earnest.
“We still expect a 25bps rate increase, but with even greater conviction that this will represent the last hike of this tightening cycle.
“The Bank will attempt to guide expectations towards its preferred “Table Mountain” profile for interest rates, with policy staying tight for an extended period. However, market attention is likely to increasingly turn to the timing and magnitude of a putative easing cycle next year.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“Figures from the ONS this morning reveal an unexpected downtick in inflation to 6.7% in the 12 months to August 2023, despite rising prices at the petrol pumps. It’s a considerably more positive outcome than the uptick many economists had predicted largely driven by a significant fall in food prices, while core inflation also reduced from 6.9% to 6.2%.
“While this dip in inflation eases the pressure somewhat on the Bank of England to raise rates once more, it likely still remains poised to pull the trigger on another 25bps interest rate hike tomorrow. If this proves to be the case, many will be asking when enough is enough. The BoE has had a tough task in navigating its fight against inflation, and this morning’s figures suggest it may finally be having a real impact.
“While inflation fell slightly in August, just yesterday the OECD forecast the UK to have the highest inflation rate among the G7 nations, expecting it to average 7.2% in 2023 – a rise on its previous forecast of 6.9%. Households remain under immense pressure given inflation is still well above the BoE’s 2% target and these figures will come as a blow, not least because the Bank of England is still expected to keep its foot on the pedal for now.
“Economic data has begun to sour and businesses and consumers appear to be starting to buckle following the sharp increase in interest rates over the last 18 months. The rate at which the BoE hiked rates to 5.25% means the toll could be rather severe, and a recession is not yet entirely off the cards so the BoE will need to tread very carefully.
“Today’s inflation figure also has real political ramifications too. While this downtick is a positive, it will need to fall considerably more in order to meet Rishi Sunak’s target to cut inflation in half by the end of the year. With an election at most a year away, failing to hit that target would hurt the credibility of the Conservatives and make a Labour victory more likely. While a pause in interest rates is nearing, the beginning of political volatility will begin to come into view for markets.”
According to Tomasz Wieladek, chief European economist at T. Rowe Price, the inflation surprise points to one final BoE hike as he comments:
“UK CPI inflation rose by 6.7% in August, a small drop relative to the 6.8% seen in July. However, the devil is in the detail. Core CPI inflation fell sharply from 6.9% to 6.2%, while services CPI inflation fell from 7.4% to 6.8% – as a result of a significant drop in accommodation services inflation. Core CPI inflation and services CPI inflation – which the Bank of England (BoE) considers the most relevant measures of underlying inflation – fell significantly, which has important consequences for the BoE meeting tomorrow.
“The BoE has faced different types of surprises since its August meeting. AWE and pay growth continued to surprise to the upside, with July pay growth of 8% against an expectation of close to 7%. Wage pressures are the most important determinant of medium-term inflation and are still surprising the BoE to the upside.
“On the other hand, the unemployment rate has started to rise above what the BoE expected and a number of other survey indicators, such as the RICS housing market survey and the CBI retail survey, suggest the real economy is likely sliding into recession. Therefore, the real economy data will become markedly weaker in the coming months.
“The BoE will have to trade off these data surprises. I expect the debate at tomorrow’s meeting to be particularly heated. Although near-term inflation dynamics are looking better, and the weakness in demand demonstrates the monetary policy transmission mechanism is working, the medium-term inflation outlook likely worsened since August due to higher pay growth surprises.
“Given this news, I expect the BoE to reach a compromise. It will hike by 25bps but also indicate this is probably the last rate rise in the cycle. There are risks the BoE remains on hold. However, whatever happens tomorrow with the policy rate, I believe the BoE will accelerate its QT programme.”
Dr Arun Singh, Global Chief Economist, Dun & Bradstreet said: “While it’s great to see that the Bank of England’s measures are continuing to lower inflation, this surprise drop in headline inflation implies businesses should remain cautious – particularly since global crude oil prices are rising rapidly, which could lead to higher fuel costs and another rise in inflation in coming months. While it still seems likely that the BoE will raise rates, given the persistence and strength of service sector inflation and wage growth, this unexpected drop today has significantly raised the odds of the central bank pausing. Should the BoE move to raise interest rates, we will be looking for signals that it is ready to hold rates for an extended period of time.
“What remains clear is that the UK is still facing a turbulent economy. Earlier this year we found that only 27% of companies rated their business extremely resilient during turbulent times and 85% of business leaders are not utilising data to understand disruption in their ecosystem. Businesses are going to have to continue to focus on how they can remain resilient, productive and competitive as the UK economy cautiously navigates itself out of this rocky period. This is where quality data insights can provide a competitive advantage and bolster business resilience.“
Rob Morgan, Chief Investment Analyst at Charles Stanley, sees relief for the Bank of England as inflation surprises on the downside
“Today’s August CPI reading confirms that UK inflation is now on a broad downtrend. The fall to 6.7% in August from 6.8% in July defied market expectations of a small rebound, and represents a further small step in the right direction for the Bank of England (BoE) which is trying to bring it down to its target level of 2%.
Despite a rise in petrol costs there was a broad easing in most other areas with food as well as restaurants and hotels providing the largest contributions to the easing. Meanwhile, the closely-watched core CPI, which excludes volatile energy and food prices receded to 6.2% from 6.9% in July, and services inflation fell back to 6.8% from 7.4%, both encouraging signs for the Bank that inflation is on a downward trajectory and that rate hikes so far are having the desired impact.
Of concern to the BoE has been the rapid growth in wages, in excess of 8% year on year, meaning consumers are more likely to be able to keep up with rising prices, potentially fuelling inflation further. Added to a resurgent oil price, which means energy can’t be relied upon to be a falling component of inflation any longer, it means the Bank still has a job on its hands to get inflation back to target. However, it will take heart from these inflation numbers that it is currently on the right track.
Commenting on what does it mean for tomorrow’s interest rate decision, Morgan said:
“ The BoE has to contend with a complex picture at tomorrow’s rate setting meeting, balancing the weak state of the economy with inflation that remains well over target. It must weigh up the merits of pausing rate hikes but keeping them higher for longer, against increasing them now to try to nip inflation in the bud at the risk of a greater economic downturn.
Despite wage growth remaining hot and fuel prices trending higher it looks quite likely the BoE will pause for now and consider more economic and inflation data over the next couple of months. Weak GDP figures for July and cracks starting to show in the jobs market are evidence of an economic slowdown that should help bring inflation back to the trajectory the Bank is happy with, and today’s inflation reading adds little impetus to go for a hike right away.
But are we at peak rates already?Getting the inflation genie back into the bottle has been a struggle for the Bank of England as it grapples with the highest rate of inflation among the world’s developed economies. However, there is now light at the end of the tunnel, and although one more rise is still likely it is also possible that we are at the peak for interest rates given the weakness evident in the economy and that the full effects of previous rate increases are still to be seen.
However, current elevated interest rates are set to stick around given the BoE’s 2% inflation target is still a long way off, and it’s unlikely we will see rate cuts until well into next year. Overall it means an interest rate trajectory that looks more like Table Mountain than The Matterhorn – as BoE Chief Economist Huw Pill recently described it.“
Daniele Antonucci, Chief Investment Officer, Quintet Private Bank (parent of Brown Shipley) said:
“That today’s report on UK inflation surprised to the downside, pretty much across all key measures, supports our view that the Bank of England is not too far from pausing its rate hiking cycle.
“This is especially remarkable because petrol costs have risen recently. Importantly, core inflation excluding volatile components such as food and energy, while still elevated, decelerated.
“There is evidence that higher interest rates are having their intended impact: inflation is falling and activity is slowing. Now the messaging from central bankers is beginning to point to a peak in rates. That is not to say that the inflation battle is won, but the tide is indeed turning.
“We believe that central banks will keep rates elevated over the coming months to ensure there’s no inflation resurgence. The Bank of England may raise rates once or twice before pausing, depending on the inflation outlook. The important thing though, is that these elevated rates will put pressure on economic activity and then, as it slows, central banks will lower rates in 2024 to support growth.
“As rates peak, bonds become more attractive. Historically, their yields tend to trend in line with central bank rates, as the chart below shows. Therefore, we believe now is a good time to add longer-dated UK bonds to portfolios to capture this higher yield before it trends lower, while also adding a cushion should the economic outlook deteriorate.
Commenting on the CPI data, Royal London Asset Management’s senior economist, Melanie Baker, said:
“The fall in inflation wasn’t just about food and hotels, and headline inflation is still likely to fall quite a lot further. First, while volatile items like air fares and hotels were partly behind the fall in core inflation, there were other contributors. Second, the rise in energy price inflation from -7.8% to -3.2% in this release should prove temporary. Powerful negative base effects from electricity and gas bills, which rose a lot last October, are likely to pull energy inflation down further in October. Third, input price figures look consistent with further falls in core goods price inflation. Fourth, I still expect a modest recession in the UK and for a looser labour market and well-behaved inflation expectations to help see lower pay growth next year.
“Domestically-driven inflation still looks strong for now, though inflation fell to 6.8% from 7.4% with falls across a number of categories, but that’s clearly still a very high rate of inflation. Pay growth remained strong on the data released last week too, of course, though the labour market figures overall were consistent with a less tight labour market.
“The Bank of England (BoE) has continued to signal that if inflation pressures prove persistent then they will likely tighten monetary policy further. The August BoE staff forecast for the August 2023 CPI figure was 7.1%, hence this figure would be a downside surprise to them in that sense. In the context of still strong domestic inflation pressure, I expect the Bank to hike rates once more by the end of the year. They might choose to keep rates on hold in September and wait for more data and their next forecast round in November, especially in light of some of the recent weak activity data and with this release being a downside surprise. Ultimately though, I think the domestic inflation picture is still too strong for them not to hike a little bit further either tomorrow or in November.”
Giles Coghlan, Chief Market Analyst consulting for HYCM, said: “This morning’s print has come in below the forecasted headline figure of 7% and core figure of 6.8%. Therefore, with the GBP now at its lowest level against the Euro since early August, investors can expect a GBP sell off to continue today on expectations that the Bank of England (BoE) will signal that lower rates are on their way at the Monetary Policy Committee’s meeting tomorrow.
“Indeed, while we are not out of the woods by any means, the core print coming in so far below the forecast is 6.8% is particularly encouraging. With inflation moving in the right direction, the BoE can adjust its focus and hold back from aggressive rate hikes – something that is sorely needed after GDP suffered its biggest drop in over seven months in July.
“As such, with the markets expecting the base rate to peak at 5.5% even before today’s data was released, the latest inflation print should consolidate the view that interest rates are close to their peak. If the BoE indicates that this is the case tomorrow, investors are likely to see the GBP slide further in the aftermath of the decision as more and more of the stretched GBP longs unwind.”