‘We’re not out of the woods’: Industry reactions to October’s inflation fall

Core inflation is ‘still stubbornly sticky’ at 5.7%

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Inflation fell to 4.6% in October over the 12-month period, down from 6.7% in September, the Office for National Statistics has reported.

Last October, current price inflation hit a 12-month rate of 11.1%, a 41-year high with the backdrop of the invasion of Ukraine and Covid-19 aftershocks. Across sectors, housing and household services dropped to -3.5% in October from 6.9% in September over a 12-month period. In October of 2022, the one-month rate hit 8.7% compared to -1.9% last month.

See also: Will the thriving US economy have an ‘inflationary sting in its tail’?

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “The significant fall in headline inflation compared to last month’s reading might come as a shock – albeit a welcome one. It is important to remember that the raw inflation figure reported through the Consumer Price Index illustrates the rise in prices from where they were a year ago.

“The light at the end of the cost-of-living tunnel is shining brighter – but we’re not out of the woods. The 14 consecutive interest rate hikes to try and get the inflation rate back down to the Bank of England’s 2% target have seen mortgage rates soar to levels not seen before the financial crisis. This jarring shift from the low rates status quo has had significant pounds and pence repercussions for many homeowners who have remortgaged this year. Higher mortgage rates have also pushed rents higher, with many landlords passing on the additional cost burden to tenants.

Hugh Gimber, global market strategist at JP Morgan Asset Management, reflected that the likely bright spots of the report for the Bank of England will be the core inflation as well as particular sectors which have proved troublesome beginning to quell.

“This report lends further support to the BoE’s recent commentary that interest rates have now reached sufficiently high levels to slow the economy down. But, importantly, the BoE is working to an inflation target of 2%, not sub 5%,” Gimber said.

“The case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered. The tightness of the labour market remains the key concern. Yesterday’s hotter than anticipated wage growth figures highlighted that 2% inflation is still some way away, and unfortunately is only likely to be reached following a more substantial slowdown in the economy.”

See also: What do ‘higher for longer’ interest rates mean for UK smaller companies?

Hetal Mehta, head of economic research at St. James’s Place, also felt there was significant progress to be made, adding: “While today’s inflation drop to below 5% will be hailed as a major milestone in the progress to 2%, the UK remains one of the highest inflation economies. Core inflation is still stubbornly sticky at 5.7%. The next phase of inflation reduction will almost certainly be more painful for the economy as the easy wins on energy after largely behind us.”

The inflation data comes in the wake of the Bank of England’s decision to pause rate hikes at 5.25% in the beginning of November in a 6-3 vote. It marked the Bank of England’s second consecutive hold.

Emma Mogford, fund manager of Premier Miton’s Monthly Income fund, said: “Today’s drop in CPI inflation is another data point which supports the idea that rates don’t need to go higher.  However, with core inflation still high, I don’t think we should expect a rate cut anytime soon. The fall in UK inflation, in line with other countries, will be positive for UK equities.”

Richard Garland, chief investment strategist for Omnis Investments, added: “This is a large fall in the headline CPI, but was widely anticipated due to year-on-year effects and falling energy prices; nevertheless, it is good news which confirms the downward trend in inflation. It is likely to mean that the Bank is in a good position to begin cutting rates in late 2024, but much depends on the strength of the labour market and the economy. The Bank is likely to want to see further weakness emerging before indicating how long policy will remain restrictive.”

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