LONDON, UK – SEPTEMBER 2021: People are seen dining in Soho, London in September 2021.
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On a month-to-month basis, headline CPI fell 0.2%, compared with a consensus forecast of a 0.1% increase.
Core CPI – which excludes volatile food, energy, alcohol and tobacco prices – came in at an annualized 5.1%, below forecasts of 5.6%.
The surprisingly large declines prompted bets that the Bank of England would cut interest rates in 2024, revealing a sharp fall in British bond yields.
The UK 10-year gilt yield was the lowest in eight months, down 11 basis points to 3.54%. Yields move inversely with prices. Meanwhile, the UK’s FTSE 100 was the only major European stock index in positive territory on Wednesday, rising 0.8% in morning trade.
The Office for National Statistics reported that the largest downward contributions came from transport, entertainment and culture and food and non-alcoholic beverages.
The Bank of England maintained a hawkish tone last week as it left its key interest rate unchanged at 5.25%. The Fiscal Policy Committee reiterated that policy “must be restrained for the long term”.
The central bank ended 14 straight interest rate hikes in September as policymakers hoped to wrestle inflation from a 41-year high of 11.1% toward the bank’s 2% target by October 2022.
UK Finance Minister Jeremy Hunt cheered the figures on Wednesday and said the country was “beginning to remove inflationary pressures from the economy”.
“With the business tax cuts announced in the fall, we are back on track for healthy, sustainable growth,” he said in a statement.
“But many families are still struggling with high prices, so we will continue to prioritize measures to help with living costs.”
Significant drop prompts Bank of England ‘downgrade’ warning
The Bank of England has repeatedly pushed back against market expectations for significant cuts in interest rates in 2024, noting last week that “key indicators of UK inflation stability have lifted”.
Suren Thiru, the ICAEW’s director of economics, said Wednesday’s “startling” fall in inflation would reassure households that there was “light at the end of the tunnel”, with underlying price pressures easing with easing core CPI figures.
“Falling wages from rising unemployment and a stagnant economy will help keep them on a continued downward trajectory,” he said by email.
“These inflation numbers suggest the Bank of England is too pessimistic in its rhetoric about when interest rates will start to fall. A deteriorating economy could push the Bank to start easing policy in the autumn, especially if inflationary pressures continue to ease.”
A ‘comfort light’
Richard Carter, head of fixed interest research at Quilter Cheviot, said the recent inflation print adds to a sense of “cautious optimism” in the UK, compared to last year’s life crisis and bond market turmoil.
Despite the fall in the CPI, he noted that the broader economic picture remains “complicated, marred by stagnation and low growth prospects”.
The UK economy shrank by 0.3% month-on-month in October, after contracting in the third quarter.
“This stagnation paints a picture of an economy struggling to recover from unprecedented challenges, with output no higher than it was in January,” Carter said in an email, adding that the slowing pace of inflation offers an opportunity. Relief to houses”.
“The pressures are manifold – from the cost of living crisis, to volatile energy markets, to the Brexit aftermath, to lingering manufacturing issues. These factors have combined to dampen economic prospects and consumer confidence.”
