UK inflation is falling from a 41-year high as fuel price hikes ease
LONDON – UK inflation came in just below forecasts at 10.7% in November, as refrigeration fuel prices helped ease price pressures, although higher food and energy prices continued to weigh on households and businesses.
Economists polled by Reuters had expected an annual increase in the consumer price index of 10.9% in November, after October saw an unexpected rise to a 41-year high of 11.1%. On a monthly basis, the increase in November was 0.4%, down from 2% in October and below the agreed estimate of 0.6%.
The ONS said the largest increases in contributions came from “housing and household services (primarily from electricity, gas and other fuels), food and non-alcoholic beverages.”
The largest contributors to the decline during the month came from “transportation, especially motor fuels, with higher prices in restaurants, cafes and bars, resulting in the largest partially equal upward contribution”.
The Bank of England will announce its next monetary policy move on Thursday. It is widely expected to raise interest rates by 50 basis points, as it deals with skyrocketing inflation and an economy that policymakers say is already in its longest recession on record.
The country faces a large-scale industrial strike over the Christmas period, as workers strike to demand higher wages close to the rate of inflation and better working conditions.
The Independent Office for Budget Responsibility has predicted that the UK will suffer the biggest drop in living standards since records began, with real household income expected to fall by 4.3% in 2022-23.
British Finance Minister Jeremy Hunt last month announced a sweeping £55 billion ($68 billion) fiscal plan, including a slew of tax hikes and spending cuts, in a bid to plug a huge hole in the country’s public finances.
A positive step, but risks remain
While the drop in Wednesday’s numbers is a step in the right direction, the persistent problem of rising food prices and household energy bills remains a thorn in the side of the British economy, noted Richard Carter, head of fixed interest research at Quilter Cheviot.
However, Carter suggested that inflation may finally be past its peak, after the US also posted a better-than-expected CPI reading on Tuesday.
“Temperatures have been dropping sharply in the last week or so, and gas demand will undoubtedly increase as people are forced to heat their homes,” Carter added.
“Because the fall has been fairly mild, we will only now start to see the real impact of higher energy bills. While the government subsidy remains in place for the time being, any changes made once the April deadline is reached could have a knock-on effect on inflation.” “.
The Bank of England faces a difficult task in trying to get inflation back towards its 2% target while remaining mindful of the weakness in the economy. This was evident in the latest UK labor market data earlier this week, which showed a slight uptick in both unemployment and wage growth.
“While inflation is falling, it is still well ahead of wages, and we are heading into a new winter of discontent over strikes concentrated in the unionized public sector and previously nationalized industries as a result,” Carter said.
The market is pricing in a 50 basis point rate hike from the bank on Thursday, which took the benchmark interest rate to 3.5%. Policymakers have indicated a possible slowing in the pace of hikes in 2023. However, inflation remains well above target.
“The Chancellor’s Autumn Statement in November helped level the playing field after months of significant turmoil, but inflation remains well above the Bank’s 2% target, which means there is still a long way to go,” Carter said.
“A rapid drop in inflation is unlikely, but it is positive to see it finally moving in the right direction.”
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