According to official statistics, the annual rate of inflation stayed at 6.7% in September of this year, which increased pressure on the Bank of England to continue its aggressive efforts to lower inflation, says Andrew Michael.
The Office for National Statistics (ONS) released today’s Consumer Prices Index (CPI), which was somewhat higher than anticipated by the market. This comes after yesterday’s data revealed that the rate of increase in UK wages fell to 7.8% in the three months leading up to August.
According to the ONS, the “core” CPI—which eliminates volatile data related to food and energy—dropped from 6.2% in August to 6.1% in September. However, rises in petrol and diesel at the pump negated this in the main statistic.
In September, the CPI, which includes owner occupiers’ housing prices (CPIH), increased by 6.3% year over year, which is the same amount as it did in August.
Chief ONS economist Grant Fitzner stated: “September annual inflation remained constant following the decline last month. The cost of food and non-alcoholic beverages decreased this month, along with the cost of household goods and airfares. The expense of hotel stays and growing vehicle fuel prices more than offset them.
“Although prices for services did slightly increase this month, the annual rate of core inflation has slowed again, primarily due to a slowdown in the cost of many goods.”
The Bank of England, tasked by the government with maintaining long-term inflation at 2%, will consider the most recent data on inflation and wage growth before determining how to adjust the Bank Rate, which has an impact on both savers and borrowers.
The Bank is scheduled to release its next interest rate announcement on November 2.
For the first time in over two years, the Bank made a risky move last month and kept borrowing prices at a 15-year high of 5.25%. International central banks have issued warnings in recent weeks that, in order to maintain pressure on inflation, borrowing prices may stay high long into next year.
Growing Middle East geopolitical tensions pose a danger to the price of oil.
The CPI report today also completes the last component of the government’s so-called “triple lock” pension policy, which is an adjustment made to the state pension increase scheduled for April of next year, contingent on one of three economic circumstances.
The purpose of the triple lock is to guarantee that the state pension increases by a real amount annually while shielding it from inflation. The metric used is the maximum of three: wage growth as assessed between May and July, inflation as calculated by the CPI measure from September, and a minimum increase of 2.5%.
The salary growth statistic revealed last month will boost the state pension by 8.5% starting in the next year, subject to any last-minute changes.
“UK inflation’s march back down to target can very much be described as’slow and steady,’ with CPI refusing to budge in September at 6.7%,” stated Marcus Brookes, chief investment officer at Quilter Investors. With this pattern, the UK is obviously losing races since inflation is still quite high compared to its counterparts.
“An economy that has had a severe cost of living problem might be struck by inflationary pressures as a result of escalating geopolitical tensions, rising energy and fuel costs, and oncoming inflation. The story of higher borrowing rates for longer terms will endure for the time being.
“12.6 million people are currently in receipt of the state pension, so any last-minute tweaks to the triple lock will have a material impact on the day-to-day lives of millions of people, not least those for whom the state pension is their only source of income,” stated Patrick Thomson, head of research and policy at Phoenix Insights.
“A majority of adults over 66 who are still employed anticipate that their primary source of income in retirement will be the state pension.”
According to figures released today by the Office for National Statistics, annual pay growth in the UK decreased little in the three months leading up to August of this year, although it was still very near to all-time highs, says Andrew Michael.
According to the ONS, between June and August 2023, ordinary wage growth—exclusive of bonuses—rose by 7.8% annually. Although the percentage decreased somewhat from the 7.9% recorded in the three months leading up to July of this year, it is still among the highest since similar statistics were first kept in 2001.
Between June and August, the average annual rise in employees’ total compensation, including bonuses, was 8.1%, which was a decrease from 8.5% a month earlier. The ONS stated that one-time payments given to NHS employees and government workers over the summer had an impact on this statistic.
The most recent wage data presents no proof that labour market pressures are abating, which will provide a problem for those who decide interest rates at the Bank of England when they convene again on November 2.
The triple lock, an adjustment made to the amount of the state pension for the next year that is dependent on one of three economic indicators, may also be impacted by the news of today.
For the first time in over two years, the Bank did not raise borrowing prices last month. This was in response to better-than-expected data that indicated inflationary pressures had begun to ease in the UK economy.
Despite a steady decline from its October 2017 record of 11.1%, the current inflation rate of 6.7% is still much higher than the Bank’s long-term objective of 2%, established by the
Currently, the inflation figure – due to be revised tomorrow (Wednesday) – is lower than today’s wage growth figures, creating a challenge for those in charge of setting the Bank Rate, which currently stands at 5.25%.
Alice Haine, personal finance analyst at Bestinvest, said: “High wage growth can ease the financial squeeze for households, [but] it runs the risk of fuelling inflation if businesses pass on that cost to customers by hiking the price of their goods and services. This would only add further pressure to household finances at a time when energy prices are under threat from geo-political tensions and rising demand amid the colder weather.”
“Wage growth is slowing down quickly enough for the Bank of England’s Monetary Policy Committee to keep Bank Rate at 5.25% next month,” stated Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Head of Retirement Analysis at Hargreaves Lansdown, Helen Morrissey, stated: “This wage data could influence the government’s perspective on the triple lock.” The average pay growth, including bonuses, decreased to 8.1% from the 8.5% increase observed previous month. The state pension triple lock calculation should utilise this 8.5% number, which should provide retirees their second consecutive blockbuster rise as inflation is starting to decline.
But, considering that these numbers have increased due to the effects of one-time payments made to NHS employees and civil servants over the summer, it’s possible that the government may consider taking a somewhat different approach. Average salary increases, exclusive of bonuses, stay at 7.8%. Should the government adopt this percentage, it may save money on the state pension bill while providing retirees with an increase that should outpace inflation.
Summary According to Andrew Michael, US inflation remained constant from one month earlier in the year ending in September 2023 at 3.7%.
The Consumer Price Index (CPI) for All Urban Consumers increased month over month by 0.4% on a seasonally adjusted basis in September, according to a report released today by the US Bureau of Labour Statistics. In August, the index had increased by 0.6%. The Bureau stated that a spike in gasoline prices was also a “major contributor” to an increase in the inflation index for “all items,” attributing more than half of the September increase to housing.
As anticipated, the 12-month number dropped to 4.1% from 4.3% in August after a 0.3% increase in September’s core CPI, which eliminates volatile food and energy costs, increased.
The Federal Reserve, the US version of the Bank of England, maintained borrowing prices last month at 5.25% to 5.5%, ending an eighteen-month period marked by several rounds of monetary tightening aimed at containing persistently rising inflation.
The Fed is obligated, like all other central banks globally, to keep long-term inflation at 2%.
On November 1, the Federal Open Markets Committee (FOMC), which sets interest rates, will make its next announcement.
These numbers are in close succession to those released last week, which showed that the US economy created 336,000 new jobs in September, far more than the 170,000 jobs that were predicted.
“Today’s CPI print is reassuringly uneventful, after the shock and awe of last week’s jobs report,” stated Seema Shah, chief global strategist at Principal Asset Management. Nothing in the inflation data should influence the Fed’s decision, since the core CPI is in line with forecasts and supports the disinflation story.
In fact, even while inflation is gradually declining, the robust job market implies that a spike in inflation is still a possibility, which keeps the Fed vigilant. There is still little certainty as to whether interest rates will rise one more time.
“The ongoing slowdown in core inflation could go some way to counteract the jobs report last week if the FOMC is to keep interest rates on hold when it next meets on November 1st,” stated Daniel Casali, chief investment strategist at Evelyn Partners.
Furthermore, since the markets have essentially done their work for them, policymakers are likely to give weight to the recent significant increase in long-term government rates, which lessens the need for the Fed to tighten further. The FOMC will also be conscious of how car industry strikes and a possible US government shutdown may affect GDP starting in mid-November.
Before the Fed meets later this month, Neil Birrell, chief investment officer of Premier Miton Investors, stated: “They shouldn’t have too much trouble with the most recent US inflation report.” The September core rate was as anticipated, allowing the Fed to go forward cautiously.
Overall, the labour market continues to support the economy, which is resilient despite stricter regulations. This statistic won’t disappoint those hoping for a gentle [economic] landing, but they also won’t want to see it rise any more.
According to Marcus Brookes, chief investment officer at Quilter Investors, “the US remains in a much better place in the battle against inflation compared to other developed economies, and it is from this position of strength that its economy has been able to resist any recessionary prediction to date,” despite headline inflation refusing to budge following the most recent official figures.
But just as markets were worried when inflation surged the previous year, they will also be worried about inflation’s future course and what comes next. The inflation rate has decreased, but it has returned to being extremely obstinate and is unlikely to attain its objective for some time.
This puts the Federal Reserve in a precarious situation once more. It wants inflation to return to goal, but what can it do if it is expected to be over that level for long time? It has been considering raising interest rates once more this year, although doing so would pose a risk of an overcorrection. Alternatively, it may hold off and carry on with its “higher for longer” message, which has rattled markets recently, but run the danger of going too slowly.
After yesterday’s better-than-expected data revealed inflationary heat is still emanating from the UK economy, the Bank of England decided to leave borrowing prices unchanged for the first time in over two years, says Andrew Michael.
The Bank Rate is now at a 15-year high of 5.25% following today’s razor-thin decision by the Bank’s Monetary Policy Committee (MPC), which voted 5-4 in support of the change. This might be the top of borrowing prices for the current cycle, capping a series of 14 straight increases that began in December 2021.
The decision was made the day after official data revealed that inflation in the UK decreased from 6.8% a month earlier to 6.7% in the year ending in August 2023 (see article below).
Even while inflation has gradually decreased after reaching a peak of 11.1% in October of last year, the 6.7% number is still far higher than the government’s long-term 2% objective for the Bank of England.
The MPC declared: “The MPC will keep a close eye on signs of resilience in the overall economy and persistent inflationary pressures, such as the tightening of labour market conditions, wage growth, and inflation of services prices.
As mandated by the Committee, monetary policy must be sufficiently tight for a long enough period of time to bring inflation back to the 2% objective in the medium run. If there was proof of more persistent inflationary pressures, greater monetary policy tightening would be necessary.
The Bank Rate will be decided upon on November 2, 2023.
“Of concern to the Bank has been the rapid growth in wages, in excess of 8% year on year,” stated Rob Morgan, chief investment analyst at Charles Stanley. “This means consumers are more likely to be able to keep up with rising prices, potentially fueling inflation further.”
“In addition, energy can no longer be counted on to be a declining component of inflation, so the Bank still has work to do to get inflation back to target.”
More than a million borrowers with variable rate and tracker mortgages, who have been hit hard by a string of escalating home loan rates dating back to December 2021, will find some respite from the news released today.
“The Bank of England’s Monetary Policy Committee has delivered some relief to hard-pressed households by maintaining the base rate of interest at 5.25%,” stated Jeremy Batstone-Carr, European strategist at Raymond James Investment Services.
“There is little question that the Bank’s decision was primarily influenced by the decline in the UK’s inflation rate in August, especially the significant decline in underlying price pressures that suggests earlier rate hikes are starting to take effect.”
HSBC Asset Management’s Hussain Mehdi stated: “The 5-4 vote split reflects the MPC’s extremely difficult decision. A more “dovish” disposition among policymakers is probably the result of the unexpected decline in inflation in August and the evident evidence that the UK economy is faltering under the weight of rising interest rates.
We share the belief that the Bank Rate has reached its top, which applies to both the policy rates of the US Federal Reserve and the European Central Bank. Labour market data is behind, despite the fact that the most recent wage growth figures in the UK are concerning. According to forward-looking indicators, the UK economy is already on the verge of recession, which is consistent with slower wage growth and a change in policy.