UK Inflation Slows Unexpectedly In November – Reactions

Amanda Cheesley Deputy Editor 21 December 2023

UK Inflation Slows Unexpectedly In November – Reactions

After the UK’s annual inflation rate fell sharply in November to its lowest rate in more than two years, investment managers assess the impact.

The latest data released this week by the Office for National Statistics shows that UK headline inflation dropped unexpectedly to 3.9 per cent in November from 4.6 per cent in October, largely due to declines in motor fuel prices and recreation costs as well as a slowdown in food and drink inflation.

Annualised inflation was forecast to come in at 4.4 per cent. Nevertheless, core inflation, which strips out food and energy prices, fell more moderately from 5.7 per cent in October to 5.1 per cent, remaining elevated as services inflation continues to be high.

With UK interest rates currently standing at a high of 5.25 per cent, and the longer-term target for inflation at 2 per cent, the Bank of England is expected to hold interest rates at the current level well into 2024. The bank’s governor Andrew Bailey has ruled out cutting rates anytime soon, despite weakening economic growth.

In the eurozone, inflation has also fallen by more than expected, reaching 2.4 per cent in November, slightly above the 2 per cent target, putting pressure on the European Central Bank (ECB) to cut rates, which currently stand at a high of 4 per cent. See more here.

Here are some reactions from investment managers to the latest news.

Nicholas Hyett, investment analyst, Wealth Club
"The fall in headline inflation to 3.9 per cent marks a dramatic and unexpected fall in UK inflation. While we're still seeing prices rise faster than the US and Europe, the UK is no longer the outlier it once was. Lower rates of food and drink inflation, cheaper games and toys and lower fuel costs will have been a welcome Christmas miracle for cash strapped families ahead of the festive period, and retailers will welcome a flusher consumer too.

“However, like any Christmas miracle the main character's actions are only passingly relevant to the outcome. The fall in inflation has been driven largely by lower oil and gas and food prices, with core inflation still high at 5.1 per cent. Commodity prices aren't something governments or even central banks have much control over – and until core inflation (reflecting things such as domestic pay rises) is back closer to target we suspect the Bank of England will remain cautious on interest rates.”

Kirsty Watson, chief operating officer, advisor abrdn
“Prices are now rising at their slowest rate in more than two years, and significantly slower than the 10.1 per cent consumer price index (CPI) recorded at the start of 2023. This will be welcomed by clients and advice firms alike – both have had to shoulder increased costs.

“As we look ahead to the new year, the big questions will be whether this trend will continue, what factors might spark further price rises and how interest rates are likely to respond to future movements. Clients will value reassurance that their financial plans are prepared to keep delivering good outcomes, whatever conditions transpire, and that their advisors are on hand to help them adapt their strategies quickly if and as required.”

Daniele Antonucci, chief investment officer, Quintet Private Bank (parent of Brown Shipley) 
“The Bank of England continued to push back against a rapid series of rate cuts for 2024 while inflation is still well above target. However, the direction of travel for monetary policy seems clear. Higher rates are putting downward pressure on the economy, and inflation – which has been much stickier compared with the US and eurozone – is now falling more decisively.

“While it remains above the 2 per cent target, the pressure to grow the economy will likely outweigh the pressure to hit that target. As such, we believe the Bank of England will cut rates from mid-2024 in an effort to revive growth. We believe government bonds are still attractively valued and think end-2024 targets at around these levels make sense. We’d also envisage lower yields further out and, regardless of valuation, see the diversification benefit of quality bonds, too. But, from a momentum perspective, the near-term risk is one where government bonds reprice to the reality of more gradual cuts.”

Julian Jessop, economics fellow at the free market think tank, the Institute of Economic Affairs
"The sharp fall in inflation in November makes the Bank of England’s position on interest rates look even shakier. Almost every leading indicator has been pointing firmly downwards for some time, notably the monetary aggregates, but some on the Monetary Policy Committee still want to raise rates further.

"In reality, inflation is well on track to hit the MPC’s 2 per cent target in the first half of 2024, which would be at least a year earlier than the Bank has been forecasting. Deflation is now the bigger risk and interest rates are too high. The longer the Bank waits, the greater the risks that the economy is tipped into a recession that is wholly unnecessary to bring inflation down."

James McManus, chief investment officer, Nutmeg, the digital wealth manager 
Headline inflation needs to halve yet again, if it’s to get close to the Bank of England’s illusive 2 per cent target. And the drop from 4 per cent to 2 per cent could be tougher to achieve than the bigger drop we’ve already seen, given some of the more sticky elements.  

“While energy prices are well below last year’s levels, food prices, which have slowed according to today’s data, are still 9 per cent higher than a year ago. Services inflation is another key watch out for the Bank of England, with rising wages and a strong labour market. One final problem area for core inflation the UK is semi-durable goods, such as clothing. The other core goods categories (durable and non-durable) appear to have decelerated, but semi durables are growing over 5 per cent on a three-month/three-month basis, having accelerated from earlier in the year. Together with the wages picture, there is plenty for the Bank of England to chew over on the inflation front.”

Amanda Aumonier, director of mortgage operations,
“A decrease in inflation should typically prompt the Bank of England to consider cutting interest rates, however, current indications suggest that Andrew Bailey will keep the base rate at 5.25 per cent for at least the first six months of the upcoming year, which means that  mortgage interest rates are likely to stabilise for the time being.

“For homeowners whose fixed rate deal is coming to an end within the next six months, it’s vital that you talk to a mortgage broker ASAP. Even though mortgage rates have fallen from 6 per cent-plus to 4 per cent-plus this year, it’s still going to be a shock for thousands of homeowners who are coming to the end of their ultra-low fixed-rate deals. Don’t bury your head in the sand about the fact that your mortgage repayments will shoot up – it’s important to budget for what’s to come and get your head around the drop in your disposable income.” 

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