Victoria Scholar, head of investment at Interactive Investor, issues inflation and interest rate warning
Which was a bit deflating. As a financial journalist, I seem to have spent the whole year waiting for consumer price inflation (CPI) to get under control. I assumed that when it did, the mood would lighten and we could look forward to brighter days to come. Which shows how naive I am.
Instead, all I’ve heard so far are “ifs” and “buts” and “maybes”, punctuated by gloomy warnings that inflation might even climb from here, rather than fall further.
The only happy people will be Prime Minister Rishi Sunak and Chancellor Jeremy Hunt, who have smashed their target of getting inflation down to five percent by Christmas with two months to spare.
Although as I pointed out in April, they shouldn’t really take the credit because it’s got very little to do with them.
So why the downbeat reaction? October’s inflation drop is brilliant news and bigger than expected. Yesterday, I wrote that markets were expecting CPI to fall to 4.8 percent, and that seemed incredible.
In reality, it fell even faster. And it’s more than halved from last October’s peak of 11.1 percent.
Even core consumer price inflation, which strips out volatile elements like energy, food, alcohol and tobacco, fell from 6.1 percent to 5.7 percent.
That’s important because the Bank of England’s monetary policy committee (MPC) watches that figure closely when setting interest rates.
That didn’t dispel the gloom either.
Partly, it’s a British thing. We don’t do optimism these days. The slow decline of the last century has made us a cautious bunch.
It doesn’t help that the 210 percentage point drop from September’s figure of 6.7 per cent is likely to be the biggest we will see in this cycle.
The main increase for the drop is the falling cost of energy imports. Regulator Ofgem cut the price cap by 7.1 percent from October 1 to £1,834 while last year’s huge 27 percent hike fell out of the annual figures.
Electricity prices are down 15.6 per cent in a year and gas is down a whopping 31 percent.
There was further good news as food and non-alcoholic drink prices fell from 12.1 percent in September to 10.1 percent, while staples like milk and butter actually dropped in price.
Others are still rising, though, with olive oil costing 50.2 percent more than a year ago while sugar is 49.6 percent more expensive.
The oil price has been falling as markets calculate the conflict in Gaza will be contained and won’t drag the US and Iran into a direct confrontation. If they’re wrong oil – and inflation – could rocket.
The Bank of England has also put a dampener on things, as it usually does, forecasting that inflation will average around 4.5 percent in the first three months of 2024 year, before falling to 3.75 percent from April.
It will take another two years before it gets close to its target of two percent. So don’t expect the MPC to start slashing interest rates at speed.
Yet I still think we’ve just taken a huge step towards recovery.
It’s good news for state pensioners, especially if Jeremy Hunt green lights the 8.5 percent triple lock increase in next week’s Autumn Statement, which will hand 12 million an inflation-busting increase.
That could trigger further calls for the triple lock to be axed but pensioners aren’t exactly flush as they spend a higher proportion of their incomes on essentials like food and energy, which still cost a fortune.
Falling inflation is good news for savers as it means the real value of their deposits will erode at a slower rate. However, it also means that today’s best buy savings rates will continue to slide.
Today’s sharp inflation drop will ease pressure on mortgage borrowers, as lenders will start cutting it may inspire lenders to trim rates.
Morgan Stanley now reckons the first base rate cut would come in May, which is just over half a year away.
That will be something to celebrate. A house price crash now looks even less likely.
Importantly, the UK is no longer a global outlier. Our inflation is now falling in lockstep with everywhere else, and Brexit has got little or nothing to do with it.
Things are finally pointing in the right direction. Please don’t be too glum about it.
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