UK inflation climbed to 2.6% in November, underscoring the challenges faced by the Bank of England as it struggles with persistent price pressures and a stagnating economy. The increase, which rose from 2.3% in October, highlights the delicate balancing act required to maintain economic stability while addressing the growing cost of living.
Figures released by the Office for National Statistics on Wednesday revealed that higher prices for motor fuels and clothing were among the main contributors to the rise. These sectors have seen steady increases in costs, placing additional pressure on households and businesses already dealing with broader economic uncertainties.
The latest inflation figures come at a critical juncture for the Bank of England, which is scheduled to hold its Monetary Policy Committee meeting on Thursday. The committee is widely expected to keep interest rates steady at 4.75%. This decision follows two earlier reductions in borrowing costs this year as part of a strategy to mitigate the impact of economic stagnation.
While the decision to hold rates may provide some relief to borrowers, it also reflects the Bank’s cautious approach in navigating the complex landscape of rising inflation and subdued economic growth. The central bank must weigh the risk of fuelling further inflation against the need to support a struggling economy.
The rise in inflation is also indicative of broader economic pressures, including global supply chain disruptions and fluctuating energy prices. These factors, compounded by domestic challenges, continue to exert upward pressure on consumer prices, straining household budgets and limiting spending power.
As the holiday season approaches, many families may feel the pinch of rising costs, particularly in essential goods and services. This could further dampen consumer confidence, which is a vital driver of economic activity.
Policymakers will be watching closely to see whether inflationary pressures persist into the coming months. The Bank of England’s actions in response to these pressures will play a pivotal role in shaping the economic outlook for 2024.
This latest data serves as a reminder of the ongoing challenges in achieving price stability while fostering economic growth, a task that remains central to the Bank of England’s mandate.
The UK economy has experienced two consecutive months of GDP contraction, with business surveys indicating weaker confidence and reduced hiring intentions. These trends have been linked to the tax-raising measures introduced in Rachel Reeves’ Budget in October. Meanwhile, a rise in inflation and increasing wage growth have dampened hopes for an interest rate cut at the Bank of England’s (BoE) final meeting of the year.
November’s Consumer Price Index (CPI) figures have further solidified this outlook. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), commented: “November’s CPI figure extinguishes any lingering hopes of an interest rate cut on Thursday. Concerns over mounting inflation risks, including the recent spike in pay growth, mean that a February loosening is not a done deal.”
The data has also had an immediate impact on financial markets. Following the release, sterling slipped by 0.1% to $1.269. Investors, as reflected by swaps market indicators, have largely dismissed the possibility of a rate cut this week and now predict only two reductions in interest rates during the next year.
Core inflation, which excludes volatile components such as energy, food, alcohol, and tobacco, climbed to 3.5% in November, up from 3.3% in October, according to data from the Office for National Statistics (ONS). This persistent rise in core inflation underscores the continued challenges faced by policymakers in controlling price growth.
In addition to core inflation, services inflation – a key measure monitored by the Bank of England to assess domestic price pressures – remained steady at 5% in November. While this matched October’s figure, it fell slightly short of analysts’ expectations, which had predicted a marginal increase to 5.1%.
The combination of rising inflation and wage growth has intensified the Bank’s dilemma. While inflationary pressures demand caution, there remains a need to balance this with measures that could support economic recovery amid a stagnating GDP.
As the year draws to a close, the Bank of England’s policy decisions will remain under close scrutiny, with many looking to its next moves for indications of how it plans to navigate these challenging economic conditions.
The latest data paints a complex picture for the UK economy, where the path forward involves grappling with persistent inflation, cautious market sentiment, and the need to restore economic growth.
Governor Andrew Bailey has emphasised that the Bank of England (BoE) will continue to ease monetary policy gradually, though officials remain wary of persistent inflation in the services sector. This caution stems from the ongoing elevation of services price inflation, which remains a key indicator of underlying domestic pressures.
Clare Lombardelli, the BoE’s deputy governor, recently expressed concerns in an interview with the Financial Times. She noted that services price inflation remains “well above” the level required to meet the Bank’s 2 per cent target. November’s services price inflation reading, which slightly exceeded the BoE’s forecast of 4.9 per cent, underscores the challenge of bringing inflation under control.
Although inflation has significantly dropped from its peak of 11.1 per cent in October 2022, the BoE now faces a new challenge: a slight uptick in inflationary pressures amid an already strained economic landscape. According to Paul Dales, an economist at Capital Economics, inflation could remain nearly one percentage point above the BoE’s 2 per cent target early next year. This marks a stark change from September’s CPI growth of just 1.7 per cent.
The impact of fiscal policy also looms large. The BoE is closely monitoring the effects of the recent Budget, particularly the proposed increase in national insurance contributions for companies announced by Chancellor Rachel Reeves. These measures may inadvertently add to inflationary pressures in an already fragile economy.
Moreover, the chilling effect of the Budget on hiring plans is becoming apparent. Business confidence surveys indicate that firms are increasingly cautious about expanding their workforce, further complicating the BoE’s efforts to manage inflation while supporting economic growth.
Despite the significant drop in headline inflation from last year’s peak, the persistence of core and services inflation highlights the complexities faced by policymakers. A measured approach to easing policy remains critical, but inflationary pressures tied to fiscal changes and labour market constraints demand careful navigation.
As the BoE balances these competing priorities, its decisions in the coming months will likely set the tone for the broader economic outlook. With inflationary pressures lingering and fiscal policies adding uncertainty, the road to economic stability remains challenging.
The increase in employer national insurance contributions is expected to significantly impact service-based businesses, where staff costs form a substantial part of their budgets. Andrew Wishart of Berenberg Bank highlighted the potential challenges, cautioning that this development raises concerns about how much services inflation can realistically decline. Historically, a 3 per cent rise in services prices has aligned with inflation targets, but Wishart noted that achieving this goal currently “feels a long way off.”
The announcement has drawn criticism from opposition parties. Mel Stride, the Conservative shadow chancellor, accused Rachel Reeves of making “a series of irresponsible and inflationary decisions.” According to Stride, these measures will likely result in inflation remaining higher than previous forecasts, further straining the UK’s economic recovery.
Reeves, however, defended her position in a statement issued on Wednesday. She acknowledged the ongoing struggles faced by families due to the cost-of-living crisis and described the latest inflation figures as a stark reminder of the persistent challenges in creating an economy that benefits working people. She pledged her commitment to addressing these issues, stating, “I am fighting to put more money in the pockets of working people.”
The debate over the implications of the national insurance increase underscores the broader tensions surrounding inflation and economic policy. As services businesses face heightened costs, and critics question the long-term impacts of recent fiscal decisions, the path to achieving sustainable economic growth remains uncertain.
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