UK Inflation hits 8-Month High but Underlying Pressures Steady

Investors added slightly to their bets on interest rate cuts by the BoE next year – having slashed them on Tuesday after strong wage growth data – and sterling weakened as official data showed consumer prices rose by an annual 2.6 per cent in November.

That was the highest inflation rate since March, up from 2.3 per cent in October.

The rise meant inflation was moving further away from September’s 1.7 per cent – the first time that inflation had fallen below the BoE’s 2 per cent target in almost three-and-a-half years, during which time it topped 11 per cent at its peak.

“Another consecutive monthly rise in inflation, reaching its highest level since March, underscores the persistent price pressures within the UK economy,” Martin Sartorius, principal economist at the Confederation of British Industry, said.

The faster price growth was in line with economists’ expectations in a Reuters poll.

Services inflation – which the BoE views as a key measure of underlying price pressure – held at 5.0 per cent in November, unchanged from October, the Office for National Statistics said.

The economists polled by Reuters had mostly expected a slight increase in service price inflation to 5.1 per cent although the BoE had expected it to dip to 4.9 per cent.

Britain’s central bank is moving more slowly than others to lower borrowing costs and it is expected to keep interest rates on hold on Thursday after its December meeting.

Britain’s headline inflation rate in November was higher than in France, Germany or the United States.

The BoE is worried about persistently strong wage growth – data on Tuesday showed pay rose by more than expected – and the new government’s tax rise for employers and higher public spending is also expected to filter through into higher prices.

Some economists have predicted headline consumer price inflation is likely to hit 3 per cent in 2025.

The BoE predicted consumer price inflation in November would be 2.4 per cent when it published a set of projections six weeks ago.

SERVICES INFLATION

James Smith, an economist with ING, said services inflation was likely to remain stuck at around 5 per cent for the next few months but could fall as annual inflation-linked adjustments to prices for phone and internet services are made in the coming months.

“These are often tied to past rates of headline inflation which, through 2024, has been pretty benign,” Smith said. “Those annual price hikes for various services should therefore be less aggressive next April than we saw earlier this year.”

The increase in the headline rate of inflation was broad-based but most prominent for transport – particularly petrol and car purchase costs – and was only partly offset by smaller rises in air fares and the cost of eating out.

The BoE has said it will move only gradually with cuts to interest rates despite signs that Britain’s economy is losing momentum.

The ONS said its measure of core inflation, which excludes energy, food, alcohol and tobacco, picked up to 3.5 per cent in November from 3.3 per cent in October.

Factory gate price data showed prices charged by manufacturers rose 0.3 per cent in monthly terms, the most since April, echoing hints of inflation pressure in recent surveys of businesses.

Source: Reuters