Inflation drops 0.2% in the UK despite Bank of England’s hawkish tone
The Office for National Statistics has released new data showing a surprising drop in inflation in the UK. According to the report, month-on-month, headline Consumer Price Index (CPI) fell by 0.2%, a significant deviation from the consensus forecast of a 0.1% increase. The Core CPI, which excludes volatile food, energy, alcohol, and tobacco prices, came in at an annual 5.1%, well below the 5.6% forecast.
The largest downward contributions to the decline in CPI came from transport, recreation and culture, and food and non-alcoholic beverages. Despite this positive news, the Bank of England maintained a hawkish tone last week, keeping its main interest rate unchanged at 5.25% and reiterating that policy is “likely to need to be restrictive for an extended period of time.”
The central bank has been working to bring inflation back down towards its 2% target from a 41-year high of 11.1% in October 2022, ending a run of 14 straight interest rate hikes in September.
U.K. Finance Minister Jeremy Hunt responded to the latest figures by stating that the country was “starting to remove inflationary pressures from the economy” and expressed optimism for healthy, sustainable growth.
Suren Thiru, economics director at ICAEW, also noted that the drop in inflation will reassure households that there is a “light at the end of the tunnel” and suggested that the Bank of England may be too pessimistic in its rhetoric regarding future interest rate cuts.
Richard Carter, head of fixed interest research at Quilter Cheviot, acknowledged that while the drop in CPI offers a “glimmer of relief” for households, the broader economic picture in the UK remains “complex, marred by stagnation and subdued growth prospects.”
The U.K. economy contracted by 0.3% month-on-month in October, following a period of flatlining in the third quarter. Carter attributed this stagnation to a series of unprecedented challenges, including the cost of living crisis, volatile energy markets, Brexit aftershocks, and enduring productivity issues. Despite the challenges, the pace at which inflation is slowing provides a sense of cautious optimism for the future.