Western Europe November 15, 2023 / 07:27 am UTC

UK CPI Inflation Review: Headline Slumps; Core Slides Further

By Andrew Wroblewski

Superimposed over both upside and downside surprises, UK headline and core inflation have been on a clear downward trajectory in the last few months the former having peaked above 11% a year agi and the latter at 7.1% In May. We think this trend will continue and where the very favourable OFGEM-induced energy/utility bill base effects took the headline October down markedly to a 24-month low of 4.6% but where the core slid lower by a further 0.4 ppt to 5.9%, a 19-month low (Figure 1), both less than consensus thinking. The headline is some 0.2 ppt below BoE projections unveiled earlier this month, which reflects in a) the short-term softer food and non-industrial good inflation and b) in the medium-term less of the upgraded price risk the BoE added to its latest MPR. Moreover, our estimates of seasonally adjusted data (Figure 2) add to the signs of clear disinflation trend very much continuing, if not intensifying.

Figure 1: Further Fall in in Headline and Core Inflation Beckons

Source: ONS, Continuum Economics

The government will make much of the fact that CPI inflation slowed to 4.6% y/y in October 2023, down from 6.7% in September and thus has met is goal as it has more than halved from its peak of over 11% a year ago. On a monthly basis, CPI did not change in October 2023, compared with a rise of 2.0% in October 2022. The largest downward contribution to the monthly change in the CPI annual rate came from housing and household services, mainly energy, where the annual rate for CPI was the lowest since records began in January 1950. The second-largest downward contribution to the monthly change came from food and non-alcoholic beverages where the annual rate was the lowest since June 2022. 

Core CPI (excluding energy, food, alcohol and tobacco) rose by 5.7% in the 12 months to October 2023, down from 6.1% in September; the CPI goods annual rate fell from 6.2% to 2.9%, while the CPI services annual rate fell from 6.9% to 6.6%. 

The data is softer than expected, not least BoE expectations and with clearer evidence of a b road(er) fall as nine of the 12 CPI components slowed in y/y terms. All of which points to more disinflation ahead, albeit more slowly in coming months

A fresh fall in fuel prices is likely in November, but lower food and non-energy goods inflation should also trim the headline rate.Indeed, more disinflation lies in store where surveys have already flagged lower food inflation and where more falls in non-energy goods prices may even be seen in addition to those utility bill base effects.

All of this is likely to reassure the BoE. The Bank may be calmed as various alternative y/y measures of core and underlying inflation have started to fall and where seasonally adjusted core prices eased further in October (Figure 2), with recent underlying inflation running close to target on a smoothed m/m adjusted basis. Regardless, it may be that downside economy risks are now taking precedence for the MPC majority.

Figure 2: Core m/m CPI Pressures Continue to Soften?

Source: ONS, Continuum Economics

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Analyst Declaration
I, Andrew Wroblewski, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.