Inflation in the UK rose for the second month running in November to 2.6%, climbing from its lows of 1.7% in September.
Whilst a long way away off from its peak of 11.1% in October 2021, the latest figures are slightly above the Bank of England’s (BoE) target of 2%.
The largest contributor to inflation throughout the month was transport, namely due to the rising cost of motor fuels in November, according to the Office for National Statistics (ONS).
And this could continue to put upward pressure on inflation in 2025, according to Centrus director of capital markets Scott Douglas, who said: “Rising geopolitical tensions and recent events in the Middle East could also cause spikes in commodity and energy prices.
“Businesses will have to factor in heightened risk, and having a considered hedging strategy in place will be key to dealing with any potential market shocks.”
No surprises
Nevertheless, the bounce back in inflation over the past two months did not come out of the blue – the BoE warned earlier this year that it expected a rise at the end of 2024 before falling more sustainably in 2025.
Lindsay James, investment strategist at Quilter Investors, said: “In reality, inflation has been less pronounced than anticipated, with goods inflation remaining muted as oil prices have weakened further.
“Service inflation, however, continues to be the main challenge. But looking ahead, there are reasons to be optimistic that it can be brought under control.”
The government’s increase in National Insurance costs for employers is expected to bring wage inflation down towards 2-3%, James said, which should relieve some inflationary pressures on the services sector.
“While slower wage growth may be unwelcome news for workers, given wages account for around 60% of costs in a typical service sector business, it will help headline inflation return closer to the Bank’s 2% target,” she added.
Rate cuts
Another interest rate cut seems unlikely at the Monetary Policy Committee’s (MPC) final meeting of the year on Thursday 19, according to Premier Miton CIO Neil Birrell.
He said all eyes will be on consumer confidence ahead of its next meeting in early February, where they will decide whether or not to maintain the current rate of 4.75%.
“Attention will now focus on retail sales, particularly over the key Christmas period, which will give guidance on how the consumer sector is holding up,” Birrell added. “The outlook for the economy remains on a bit of a knife edge.”
After gross domestic product (GDP) fell 0.2% over September and October, Fidelity International’s investment director Tom Stevenson agreed the UK economy was “battling to escape the clutches of stagflation”.
This could have a sizable impact on the MPC’s decision making over the coming months.
