Anyone who thought that the significant downward surprise in September’s UK inflation figures would be repeated seamlessly in October was disappointed yesterday. Not only was the headline rate slightly higher than expected (which can still be explained by the one-off effects of household energy bills), but services inflation, and hence the core rate, also surprised on the upside, Commerzbank’s FX analyst Michael Pfister notes.
BoE pause is now almost a foregone conclusion
“Two facts are unlikely to please the Bank of England. On the one hand, the rather low figure for services inflation in September compared with the previous month appears to have been an outlier, distorted by volatile travel prices. In October, the components settled back into line at around their levels of previous months. On the other hand, goods prices rose again.”
“We have warned in the past that these should not be a permanent drag on core inflation to such an extent, and we therefore feel vindicated by the latest development. As for the Bank of England’s upcoming meeting in December, the figures suggest that a pause is now almost a foregone conclusion. Even the rate cut in February is being called into question.”
“We still believe that the next rate cut will take place then. The argument in favour of this is that monetary policy is still likely to be seen as quite restrictive and policymakers will certainly want to avoid falling behind the curve. However, if the upcoming inflation figures also surprise on the upside, the discussions are likely to intensify.”
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