UK inflation slows in November but "one drop doesn't signify a trend"

(Alliance News) - Inflation in the UK cooled off in November from October's record high, however analysts said it was "too soon" to declare victory.

Matthew Ryan, Head of Market Strategy at Ebury said: "Mercifully, we are finally beginning to see signs of a moderation in UK inflationary pressures. For only the second occasion since September 2021, the headline number eased relative to the previous month, while the monthly advance in prices was the weakest since January. "

The consumer price index rose by 0.4% in November against the previous month. Annually, CPI grew by 10.7%. Both the annual and the monthly increases undershot FXStreet-cited market consensus of 0.6% and 10.9% rises, respectively.

In October, prices rose by 11.1% against the previous year, the highest annual inflation rate since the National Statistics series began in January 1997.

However, Ryan noted: "It is still far too soon to claim with even a modicum of conviction that we've seen a peak in inflation, though UK households will be hoping that this is the start of a more sustained downtrend in price growth."

AJ Bell's Danni Hewson agreed: "There will be much debate about whether the slight dip is a sign that the relentless price rises that households have endured over the last 18 months might finally be coming to an end, but one drop doesn't signify a trend. Look back just a couple of months when August’s cooling breeze quickly gave way to an Autumn which delivered a 40-year inflation high."

Wednesday's CPI reading comes just a day before the Bank of England meets on Thursday. Analysts expect the bank to raise rates by 50 basis points, and Wednesday's figures have done little to change those expectations.

Ryan commented: "We suspect that today's data won’t change too much ahead of Thursday's Bank of England announcement. A 50bp rate increase still appears on the cards, although the chances of another jumbo 75bp hike are likely to have diminished."

Looking further forward, Wednesday's inflation reading may convince the bank to hold back from further rate increases, at least temporarily.

"After hiking again tomorrow, it probably makes sense for policymakers to stand back and pause for a while until it becomes clear whether there remains any serious underlying inflation problem in the UK once the base effects of high energy prices wash out and the disinflationary forces of recession and tighter financial conditions have fully impacted price pressures," Berenberg's Kallum Pickering said.

However, rates may have to remain elevated for longer as the UK faces stubborn inflation in some sectors. The largest upward effect came from price rises for alcohol in restaurants, cafes and pubs.

Handelsbanken's Daniel Mahony said: "Services inflation will be heavily influenced by nominal pay levels that are registering above 6% and is therefore likely to remain much stickier. It seems likely that we will have to wait until at least 2024 before reaching inflation levels anywhere near to the Bank of England's target."

By Chris Dorrell, Alliance News reporter

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