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The government will be hoping for a fall in CPI ahead of the Autumn Budget
There are just over two weeks to go until Labour delivers its first Budget on 30 October. According to Nicholas Hyett, investment manager at Wealth Club, the government will be “hoping for a fairy tale at the Budget, and tomorrow’s inflation result could provide the perfect backdrop”.
He says that coming after some healthy employment data today, if inflation falls from 2.2% to 1.9% as widely predicted, it suggests “an economy that’s in rude health and capable of bearing the painful higher taxes that the government thinks are needed to fund public services”.
Hyett adds: “The danger though is that the UK economy turns into a pumpkin at the worst possible moment. An unexpected inflationary spike would probably lead to interest rates remaining higher for longer, reducing the chancellor’s economic wiggle room and potentially making those tax hikes more painful. The manner of the chancellor’s arrival at Budget day will be determined when the clock strikes 7 tomorrow morning – will it be a coach and four, or does she creep in with a pumpkin under one arm and four mice trailing behind?”
Read the latest predictions for Budget day.
What do the latest wage growth figures mean for inflation?
The latest ONS labour market report was published today, and showed wages are now growing at the slowest rate in over two years.
This is good news for inflation, as there have been lingering fears that higher wages could be passed on in the form of higher prices for goods and services.
Read the latest MoneyWeek analysis: “Wage growth slows again – will interest rates fall in November?”
Will the stickiness in services inflation subside?
Much of the commentary in recent months has focused on the stickiness of services inflation – and with good cause. The services sector accounts for around 80% of UK economic output.
“Services inflation is […] the most important number for the Bank of England right now, and it’s been stickier than in the eurozone or US,” says James Smith, developed market economist at ING. “We’re expecting it to dip from 5.6% to 5.2%, which would be below the BoE’s 5.5% forecast.”
He adds: “If these figures continue to undershoot the Bank’s projections over the next few months then we think the pace of rate cuts will accelerate. A November cut looks fairly baked in, but unlike markets we think that will be followed up with another move in December.”
What inflation rate are experts forecasting?
As we gear up for tomorrow’s report, what are analysts forecasting?
Morningstar recently said the headline CPI rate is expected to nudge down to 2.1%, based on consensus estimates from FactSet. This would constitute a 0.1% drop from August’s reading of 2.2%.
The experts at ING are forecasting a bigger drop to 1.9%, driven by an expected fall of almost 4% in petrol prices. They think CPI will pick up again later this year, though, rising to around 2.5-2.7%.
The consultancy Capital Economics is also predicting a fall from 2.2% in August to 1.9% in September, followed by a rebound to 2.7% by November.
Meanwhile, Deutsche Bank says CPI could drop to “a new cyclical low” of 1.8% in September.
November interest rate decision will hinge on September CPI
Good Tuesday afternoon. There are less than 24 hours to go until September’s CPI report is released – and it’s going to be an important one in determining whether interest rates are cut at the upcoming monetary policy meeting in November.
Governor Andrew Bailey recently told The Guardian UK policymakers could become “more activist” with rate cuts if inflation continues to cool. But what will tomorrow’s report reveal?
The Monetary Policy Committee (MPC) won’t just be looking at the headline figure when deciding whether or not to trim rates. Core and services inflation will also be important indicators as policymakers assess whether domestic inflationary pressures are waning.
