- CPI inflation likely fell to 10.3% in December, from 10.7% in November, a hefty 0.6pp below the MPC’s forecast.
- Motor fuel prices plunged in December, while flash Eurozone data point to a further slowing in food price rises.
- Evidence is mixed on core goods price momentum, but the usual surge in airfares won’t lift the services CPI much.
Samuel Tombs (UK Economist)U.K.
- November's month-to-month rise in the core CPI was the smallest, adjusted for seasonality, for 11 months.
- This isn't a fluke; recent falls in shipping costs and commodity prices point to a sharp fall in goods inflation.
- Services inflation is a few months from peaking, but it will fall quickly in 2023 too, as wage growth slows.
Samuel Tombs (UK Economist)U.K.
The slowdown in the pace of core price rises in the Eurozone in November is a good omen for the U.K.
Inflation expectations among households and businesses are falling, now that a recession is taking hold.
Manufacturers’ and retailers’ excess inventory reinforces the case for expecting goods inflation to drop.
Samuel Tombs (UK Economist)U.K.
- Continued momentum in core price rises was partly to blame for the upside inflation surprise in October.
- The recent fall in shipping costs and slowing in producer price rises, however, points to a better trend soon.
- Recessions reliably crush domestically-generated inflation; we still see a sub-2% headline rate in 2024.
Samuel Tombs (UK Economist)U.K.
- We look for an above-consensus jump in CPI inflation to 10.9% in October, from 10.2% in September.
- Food prices continued to rise quickly and energy prices soared; core CPI inflation likely remained high too.
- The BRC’s non-food shop prices index leapt; services inflation likely was supported by education and rents.
Samuel Tombs (UK Economist)U.K.
- The U-turn in the direction of fiscal policy has offset the better news on the outlook for borrowing costs.
- Plausible assumptions suggest Autumn Statement measures will inflict a 0.3% blow to GDP in 2023/24.
- A halving of energy price support for households in April would raise the path for CPI inflation by about 2.0pp.
Samuel Tombs (UK Economist)U.K.
- The MPC’s forecasts suggest it needs to raise Bank Rate only by a further 50bp to hit the 2% inflation target.
- The required tightening could be even smaller, depending on the size and timing of upcoming fiscal measures.
- The MPC, however, still is nervous about upside inflation risks, so we still expect Bank Rate to rise to 4.0%.
Samuel Tombs (UK Economist)U.K.
- We expect the MPC to hike Bank Rate by 75bp next week, but to signal smaller hikes at future meetings.
- On the face of it, its new forecast for inflation will endorse the path for Bank Rate expected by markets...
- ...But it won’t incorporate the upcoming fiscal tightening; expect the MPC to emphasise the downside risks.
Samuel Tombs (UK Economist)U.K.
- October’s PMI data point to a worsening recession; a 0.5% quarter-on-quarter drop in Q4 GDP looks likely.
- Price rises are slowing, but remain too brisk for the MPC to take breath; we look for a 75bp hike next week.
- Further falls in interest rate expectations will weigh on sterling now the fiscal credibility gap has largely gone.
Samuel Tombs (UK Economist)U.K.
- September’s data showed no let up in the rate of core price rises; the MPC will continue to hike rates quickly.
- Core CPI inflation, however, will ease soon; firms have too much stock, and demand is about to plunge.
- The outlook for energy CPI inflation is unclear again, but rising unemployment will let the MPC focus on the core.
Samuel Tombs (UK Economist)U.K.
- We’ll need to raise our forecast for CPI inflation in Q2 2023 by 5pp, if Ofgem’s unsubsidised price cap returns.
- One option for the government is to maintain grants for low income households; these wouldn’t lower the CPI.
- The MPC will worry more about demand than inflation expectations; unemployment will have risen by April.
Samuel Tombs (UK Economist)U.K.
- PMI and confidence data for September suggest GDP edged down for a second consecutive quarter in Q3.
- The downturn will gather momentum, as borrowing costs for households and businesses soar.
- We now look for a 1.5% year-over-year decline in GDP in 2023, and CPI inflation not to return to 2% until 2025.
Samuel Tombs (UK Economist)U.K.
- A recession now is all but inevitable; the key questionis how the pain will be distributed.
- Hiking Bank Rate to 6% would crush domestically-generated inflation; mortgage defaults would soar.
- Hiking more slowly would depress sterling and boost imported inflation, but is the lesser evil for the MPC.
Samuel Tombs (UK Economist)U.K.
- Tax cuts which disproportionately benefit the top 1% of earners will do little to boost demand.
- Most households are worse off, because the associated depreciation of sterling will raise the price level by 1.5%.
- Mr. Kwarteng likely will impose tough spending limits in the Budget, to try to reverse the jump in gilt yields.
Samuel Tombs (UK Economist)U.K.
- The improved near-term outlook for CPI inflation has left the MPC less anxious about second-round effects.
- The MPC is awaiting more details on fiscal policy; a 75bp hike in November can't be ruled out...
- ...But the proposed tax cuts will do little to boost GDP, and spending might be cut; we still expect a 50bp hike.
Samuel Tombs (UK Economist)U.K.
- We think the MPC will raise Bank Rate by 50bp next week, despite other central banks rushing ahead...
- ...Q3 GDP is set to undershoot the MPC’s latest forecast, while the inflation outlook has improved greatly.
- Proposed tax cuts are too small to move the inflation needle, and likely will be partly funded by spending cuts.
Samuel Tombs (UK Economist)U.K.
- The month-to-month change in the August core CPI exceeded its seasonal norm by the least this year.
- The recent decline in commodity prices suggests core CPI inflation will fall sharply next year.
- Services inflation will be stickier, but the current support from energy price rises and VAT changes will fade.
Samuel Tombs (UK Economist)U.K.
- Employment has stopped rising, but labour market slack hasn't accumulated, due to increasing inactivity.
- We expect labour demand to remain flat but the workforce to grow, as immigration and participation recover.
- For now, wage growth is too hot for the MPC, but building slack and falling CPI inflation will slow it in 2023.
Samuel Tombs (UK Economist)U.K.
- The average household will spend less on energy over the next six months than during the last six.
- So a winter recession now looks unlikely, and the MPC can return to focussing on core CPI inflation.
- Fiscal policy will stabilise demand, not lift it; job market slack still looks set to emerge, limiting rate hikes.
Samuel Tombs (UK Economist)U.K.
- CPI inflation likely fell to 9.9% in August, from 10.1% in
July, returning to the level forecast by the MPC.
- A slump in motor fuel CPI inflation likely dominated the further pick-up in food inflation.
- BRC data show the pace of core goods price rises eased in August; July's large jump in rents won't be repeated.
Samuel Tombs (UK Economist)U.K.
