Consumer & Producer Prices (Nov.) - Capital Economics
UK Economics

Consumer & Producer Prices (Nov.)

UK Data Response
Written by Ruth Gregory

November’s inflation figures will probably mean that the Monetary Policy Committee (MPC) will be content to sit on its hands at its meeting tomorrow. But unless the tone of the economic news improves, there’s still a chance that interest rates will be cut early next year.

Steady inflation may persuade the MPC to remain on hold on Thursday

  • November’s inflation figures will probably mean that the Monetary Policy Committee (MPC) will be content to sit on its hands at its meeting tomorrow. But unless the tone of the economic news improves, there’s still a chance that interest rates will be cut early next year.
  • At 1.5%, the unchanged rate of inflation was a little above the projection made by the Bank of England in November and the consensus forecast of 1.4%, although in line with our own forecast. The core measure (excluding food, alcohol, tobacco and energy) also remained unchanged at 1.7%. (See Table 1.)
  • The detail showed a sharp rise in food price inflation, from 1.3% to 2.1%, which added 0.08ppts to CPI inflation. But this was offset by a smaller rise in cigarette prices than in November 2018 and downward pressure from one or two core components, including hotel accommodation and clothing.
  • Looking ahead to 2020, inflation is likely to spend more time below the 2% target than above it. After all, agricultural commodity prices point to a fall back in food price inflation to 0% by the middle of next year. And the recent slide in wholesale electricity and gas prices suggest utility prices have further to fall when the price cap is reviewed in April 2020.
  • What’s more, price pressures at the start of the production process remain weak. Our measure of core services inflation dropped back from 3.0% to 2.8%, suggesting that firms have continued to absorb higher wage costs in their margins rather than passing them onto customers. (See Chart 1.) Meanwhile, the annual rate of input price inflation stayed close to October’s three-and-a-half year low. And output price inflation slipped further from 0.8% to 0.5% in November, which should feed into the core rate of inflation in time.
  • Overall, with inflation still well below target, little sign of underlying price pressures and GDP growth running below trend, an interest rate cut on Thursday shouldn’t be completely ruled out. Even so, coupled with yesterday’s robust labour market figures, the pressure on the MPC to cut interest rates at its meeting tomorrow seems to have eased somewhat. As a result, we are maintaining our view that the MPC will keep rates on hold at 0.75% on Thursday and for some time to come.

Chart 1: Average Earnings & Core Services Inflation

Sources: Refinitiv, Capital Economics

Table 1: Consumer Prices

CPI

RPI

CPIH

Index

% m/m

% y/y

Core % y/y

Fuel % y/y

Food % y/y

Index

% m/m

% y/y

(% y/y)

Aug.

108.4

0.4

1.7

1.5

-0.2

1.8

291.7

0.8

2.6

1.7

Sep.

108.5

0.1

1.7

1.7

-2.1

1.8

291.0

-0.2

2.4

1.7

Oct.

108.3

-0.2

1.5

1.7

-3.3

1.3

290.4

-0.2

2.1

1.5

Nov.

108.5

0.2

1.5

1.7

-2.9

2.1

291.0

0.2

2.2

1.5

Source: Refinitiv


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com