Inflation no longer burns white hot - but it's still glowing
The headline annual rate edged up to 2.6% last month.
Put another way, prices across the UK in November were 2.6% higher than in November a year ago.
On the face of it, this is a setback.
It’s the second consecutive monthly rise away from the Bank of England’s 2% target (the rate at which price rises are considered to be “stable”) and inflation is now at its highest level for six months.
But perspective, please. Inflation was running at 11% two years ago, there’s no reason to fear we’re heading back there.
The key question is to what degree the rise in inflation we are currently experiencing is down to the way it is calculated and to what degree it reflects a resurgence in prices.
The statisticians at the Office for National Statistics (ONS) measure the headline rate of inflation by comparing the change in prices across the economy at two moments in time - in this instance November 2023 and 2024.But using what economists call “base effects” in this way can provide a misleading picture of what is going on.For example, the price of petrol and diesel helped to drive the headline rate up, but that’s because pump prices fell by less on an annual basis in November 2024 (-10.9 %) than they did in October 2024 (13.7%). The price of petrol did rise to 134.8 pence/litre last month but a year ago it was 151 pence/litre.But these are reasons to be concerned here. “Core” inflation - which strips away the price of more volatile items like food and energy - rose to 3.5% in a way the Bank of England wants expected.
Inflation in the services sector of the economy remained lodged at 5%
The economy is stuck in a growth rut but firms are still having to compete to attract workers and pay increases are not slowing as quickly as the Bank hoped.
Yesterday, we learned that wage inflation in the private sector is rising at 5.4% a year - well above the level the Bank of England considers to be consistent with bringing inflation sustainably back to target.
Many businesses are also trying to work out how to deal with the extra costs imposed on them in the Budget in October.
Shops, bars, pubs and restaurants face dramatically higher overheads after the Chancellor chose to increase National Insurance contributions for employers and the National Living Wage.
Some will raise their prices, others can’t. Some may decide to let staff go, while others may simply accept lower profits.
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The extent to which firms do each of these things will determine what the Bank of England does next with interest rates.
It’s a tricky time for the Bank. Zero economic growth and rising inflation are not a happy combination.
The antidote to rising prices is higher interest rates, the tonic for anaemic growth is lower interest rates. What’s a central bank to do?
Very little. At least, that’s the view of investors.
A cut before Christmas has been all but ruled out and the market is betting on just two interest rate cuts in 2025.
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