October’s consumer price inflation figures will do nothing to affect the Bank’s view – expressed at its meeting earlier this month – that interest rates will most likely be raised eventually if there is a Brexit deal and global growth recovers and cut if Brexit uncertainty persists.
Easing inflation leaves door open to interest rate cuts
- October’s consumer price inflation figures will do nothing to affect the Bank’s view – expressed at its meeting earlier this month – that interest rates will most likely be raised eventually if there is a Brexit deal and global growth recovers and cut if Brexit uncertainty persists.
- The drop in CPI inflation from 1.7% in September to 1.5% in October was a touch weaker than the consensus forecast of 1.6%, although bang in line with our expectation and the Bank of England’s November forecast. This left inflation at its lowest level in almost three years.
- Admittedly, the drop mainly reflected a slump in energy inflation and so was not a reflection of a weakening in underlying inflationary pressures. Gas and electricity prices fell by 8.7% m/m and 2.2% m/m respectively, due to the cut in the regulator Ofgem’s energy price cap – enough to subtract 0.2ppts from overall inflation. 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. Further downward pressure came from a drop in fuel price inflation from -2.1% to -3.3%.
- By contrast, core (excluding food, alcohol, tobacco and energy) inflation held steady at 1.7%. (See Table 1.) Clothing inflation rose from -1.0% to 0.5%. But this movement was offset by a dip in furniture inflation.
- Even so, underlying price pressures look benign. Our measure of core services inflation remained close to 3.0% in October, suggesting that firms are still absorbing higher costs in their margins rather than passing them onto customers. (See Chart 1.) What’s more, input price inflation fell from -3.0% to -5.1%, its lowest rate since April 2016, while output price inflation nudged down from 1.2% to 0.8%, which should feed into the core rate of inflation in time.
- Overall, the figures do little to change our view that inflation will spend more time below 2% than above it in 2020 and that if Brexit is delayed further, interest rates will be cut, by May 2020. It is only if there is a Brexit deal that we think that stronger economic growth will give firms the confidence to pass higher costs onto customers, perhaps prompting a small rise in interest rates eventually.
Chart 1: Average Earnings & Core Services Inflation
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org