UK Inflation Rises Ahead of Tomorrow’s BoE

This morning, data from the ONS indicated that headline inflation rose to 2.6% in November, marking the index’s highest level in eight months.   This 30bps increase in the annualised consumer price index from the previous month’s print came in line with expectations and marks the second consecutive month where the rate of inflation rose.   The print also marks a meaningful departure from the recent lows recorded in September where headline inflation dropped to 1.7% – the only print to have come in lower than the BOE target rate since April 2021.   The rise in headline CPI came alongside service price inflation which came in at 5% while core inflation (annualised) rose 3.5% on the year, marginally below forecasts of 3.6%.   Meanwhile, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.5% –  up from 3.2% figure recorded in October. Given that this includes mortgages and council tax – which are excluded from the CPI – this is often considered a more comprehensive gauge of inflation, and its rise is indicative of the cost pressures still facing households.   Data from the ONS also indicated that airfares experienced their greatest drop since records began well over two decades ago. Here, the ONS cited falls in airfares of European routes as one of the key drivers of the 19.3% drop.   Commenting on this morning’s release, the Chancellor said that “Today’s figures are a reminder that for too long the economy has not worked for working people.”   Attention now turns to tomorrow’s MPC meeting, where markets are expecting the Bank of England to hold rates. Looking further ahead, markets are pricing in around a 70% chance of a 25bps cut by February and around two 25bps cuts by September.

At 1900 this evening today, markets will turn their attention to FOMC where the Federal Reserve are widely expected to conduct a 25bps rate cut to bring their benchmark interest rate to a target range of 4.25%-4.5%.   This would mark the third consecutive rate cut during the current cycle and follows their decision in November to cut rates by 0.25 percentage points.   Since their last meeting, headline inflation rose further to 2.7% marking a 10bps increase from the previous month’s figures and a 30bps increase from the recent lows recorded in September. Annualised PCE – the Fed’s preferred method of gauging inflation – also rose 20bps between September and October, indicative of how the Fed are not wholly out of the woods in their fight against inflation.   During the last meeting the minutes expressed that further progress had been made on bringing down inflation, though policy makers also indicated that they would remain cautious in easing monetary conditions. Here, they noted that the options-implied modal path and the futures-implied average path had increased since their last meeting, indicative of how markets are considering that the Fed may have maintain monetary conditions higher for longer. Such views have been expressed not least in the wake of the Republican Sweep and views that some of Trump’s policies including tax breaks, tariffs and deregulation could be inflationary.   As such, notwithstanding today’s forecasted rate cut, market participants have downwardly revised the degree of rate cuts moving forward. Including today’s rate cut, markets are implying that two 25bps cuts by September.