UK Inflation softened from 4.6% to 3.9% in November
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The Consumer Prices Index (CPI) in the UK increased by 3.9% in the twelve months leading up to November 2023, marking a decrease from the 4.6% reported in October, as per official data released on December 20. While this represents the lowest inflation rate over two years, according to the Office for National Statistics (ONS), it remains approximately double the central bank's targeted 2% rate.
On a month-on-month basis, the headline Consumer Prices Index (CPI) experienced a decline of 0.2%. Moreover, the core inflation which excludes the impact of volatile food, energy, alcohol, and tobacco prices decelerated significantly from 5.7% to 5.1% for November 2023.
The softer inflation rate was influenced by factors such as decreased costs in transport, recreation, culture, and non-alcoholic beverages. Food price inflation also contributed to the decline for November. Additionally, Food prices recorded a YoY increase of 9.2%, showing a decline from the 10.1% reported in October 2023. In contrast, auto fuel prices fell to 10.6%, following a 2.4% drop monthly. Furthermore, the services sector continued to be the primary driver of inflation, with the year-over-year (YoY) increase in the CPIH all-services index slowing to 6.0%, down from 6.2% in October.
The significant drop in UK inflation has brought a sense of relief to Bank of England (BoE) policymakers. The unexpected decline in inflation led to an increase in speculation that the Bank of England might reduce interest rates in 2024. This speculation was reflected in a steep decline in British bond yields.
Additionally, the UK 10-year gilt yield fell to an eight-month low, decreasing by 11 basis points to approximately 3.54%. Yields are inversely related to the bond prices reflected in this decline. The UK Pound fell by 0.54% against the dollar, settling at $1.266. Simultaneously, the FTSE 100 saw an initial rise to its highest level since May 2023, marking a 0.7% increase by mid-morning. Additionally, government bonds experienced a rally during this period.
In September 2023, the central bank ended a streak of 14 consecutive interest rate hikes. This decision was driven by policymakers' efforts to bring inflation back towards the bank's 2% target, following a peak at a 41-year high of 11.1% in October 2022.
In the most recent decision last week, the BoE UK Inflation softened from 4.6% to 3.9% in November voted to maintain the existing interest rate of 5.25%. The central bank issued a cautionary statement, acknowledging the presence of more persistent inflationary challenges in the UK compared to the United States and the Eurozone. Notably, the headline CPI growth in the UK continues to surpass that of the US and the EU.
Emphasizing a deliberate approach, the central bank declared its reluctance to hastily lower rates. Policymakers are awaiting conclusive evidence from the labor market, seeking assurance that their measures are effective in steering inflation back towards the 2% target. The anticipated pressure on wages due to increasing unemployment and a stagnant economy is expected to contribute to the ongoing decline in wages.
Next to look out for is the UK Retail Sales data for November, which will be published on Friday, December 22nd.
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