Please see below article received from Evelyn Partners this morning, which reviews the UK inflation announcement for September.
What happened?
UK annual headline CPI inflation for September was reported at 1.7% (consensus: 1.9%) which was lower than August’s reading of 2.2%. In monthly terms, CPI was 0.0% (consensus: 0.1%), compared to 0.3% in February.
Core inflation (excluding food, energy, alcohol, and tobacco) was 3.2% (consensus: 3.4%), which was below the prior reading of 3.6%.
What does it mean?
For some time now the UK has appeared to be facing stickier inflationary pressures when compared with other advanced economies. The bond market has been particularly concerned with comparatively high core CPI prints, and in particular, services inflation, which has been running above 5% since June 2022. These measures are a better gauge of domestically generated inflation than the headline CPI measure, which is more influenced by external factors such as global energy prices.
So this CPI print will have been welcomed by both the bond market and the Bank of England. Core inflation decelerated from 3.6 year-on-year to 3.2%, while services inflation fell sharply from 5.6% to 4.9%. The largest downward contribution to the monthly change in the CPI annual rate came from transport, with larger negative contributions from air fares and motor fuels; the largest offsetting upward contribution came from food and non-alcoholic beverages.
We also received the latest UK labour market data this week, which pointed to further softening in the jobs market. Wage growth continued to decelerate while the number of job vacancies declined from 856,000 in the three months to August to 841,000 in the three months to September.
With Andrew Bailey, the Governor of the Bank of England, commenting earlier in the month that the Bank could be a “bit more aggressive” in its rate cutting cycle, the recent data seems to support his comments. Although headline inflation is likely to move higher again in the coming months given that the energy price cap increased by 10% on the 1st October.
Money markets are now expecting quarter point cuts at the next three monetary policy meeting. The pound sold off in response.
Bottom Line
September’s CPI inflation print came in lower than expectations, with a notable deceleration in services inflation. When coupled with soft labour market data, we think the Bank now has cover to be more aggressive in its rate cutting cycle.
Please check in again with us soon for further relevant content and market news.
Chloe
16/10/2024