UK CPI Inflation Review: Headline and Core Slide (Clearly) Further?
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 10% in February and the latter at 7.1% In May. Very much this trend continued in November with another downside surprise seeing the headline rate down markedly to a 27-month low of 3.9% but where the core slid lower by a further 0.6 ppt to 5.1%, a 23-month low (Figure 1). We note these outcomes are well below BoE projections unveiled last month (ie by 0.7 ppt), which reflects 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, albeit not intensifying. The CPI data are soft enough to swing BoE worries away from wages as it assesses persistent price pressures.
Figure 1: Further Fall in in Headline and Core Inflation Beckons
Source: ONS, Continuum Economics
The government has made 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 more than halved from its peak of over 11% a year ago. The drop has little to do with government action, the very opposite. Instead, both supply and demand factors are reining in price and cost pressures and more broadly so.
As for the latest numbers, CPI inflation slowed to 3.9% in the 12 months to November 2023, down from 4.6% in October. The largest downward contributions to the monthly change in both CPIH and Core CPI (excluding energy, food, alcohol and tobacco) rose by 5.1% in the 12 months to November 2023, down from 5.7% in October; the CPI goods annual rate slowed from 2.9% to 2.0%, while the CPI services annual rate eased from 6.6% to 6.3%. Notably food inflation fell into single digit territory while restaurant inflation (often cited as an in indicator of persistent price pressures slowed to 5.3%, down over a ppt.
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. However, recent months suggest that this slowing in core adjusted inflation has not intensified, instead with recent underlying inflation remaining close to target on a smoothed m/m adjusted basis (Figure 2). Regardless, it may be that downside economy risks are now taking precedence for the MPC majority but where some n the MPC want to see more convince g evidence that wage inflation is abating. The problem here is that the official data on labor market issues is still far from authoritative. But ghe MPC concerns about domestically generated inflation can be tempered by the clear fall in services inflation.
Figure 2: Core m/m CPI Pressures Stabilising Near Target?
Source: ONS, Continuum Economics