UK inflation was unchanged for this month. It may be persistently high, but the Bank of England is unlikely to move on interest rates.
- The latest CPI reading was driven by rising oil prices
- There are real signs of weakness in the labour market.
- The UK economy is already faltering and recession seems increasingly likely
While it is best not to draw too many conclusions from a single inflation number, the latest CPI reading for the UK was disappointing. Policymakers would far rather have seen a steady downward trend for inflation, confirming their stance on interest rates was correct. Instead, inflation is proving stubborn.
The latest reading was driven by higher oil prices, which have ticked up since the start of the summer. Petrol rose 5.1p a litre. While there were some encouraging signs – milk, cheese and egg prices all fell – there are still concerns on the level of wage growth. Wages continue to outpace prices, which could make inflation stickier.
Oil prices are likely to remain an intractable problem. Renewed tensions in the Middle East are likely to create concerns over supply and raise prices. The oil price had been falling – from $94 to £81 a barrel from 27 September to 6 October, but has now spiked higher again. OPEC cut production earlier this year and in September, Russia and Saudi Arabia extended these curbs under the year end. The odds are against any immediate fall in the oil price.
However, if the only problem is oil, central banks are unlikely to be swayed. The oil price is always capricious and raising UK interest rates will do little to impact it. In doing so, the Bank of England would risk exacerbating the cost of living crisis without any discernible impact on inflation.
The real problem is wages. Ever-higher wages risks embedded inflation and the last set of data showed wage growth dropping only marginally. However, there are other signs of weakness in the labour market. Unemployment is rising and vacancies are falling. This suggests wage growth could start to dip from here. This should have a ripple effect through the inflation numbers.
The consensus appears to be that the Bank of England has done enough and is unlikely to change its position based on the data this week. Marcus Brookes, chief investment officer at Quilter Investors, says the first rate cut may come sooner than people think: “GDP growth is already faltering and it will take a big effort for a recession to be avoided. The pain may have been deferred to 2024, but as such the BoE will be required to act sooner than it may like.”
The latest inflation data may be unwelcome, but it is unlikely to move the dial on monetary policy. Nevertheless, it does add to the UK’s economic pain and make a recession look almost inevitable in the months ahead.
