Inflation’s peak?
Yesterday’s publication of the latest UK inflation report will be welcomed by households and the government alike. The report released prior to the market open yesterday showed UK inflation to September remained stable month-on-month. That might not sound like a whole lot at face value, but it is in fact critical that headline inflation did not reach the 4% the consensus forecast was calling for. Despite expecting a rise to 4%, September was expected to mark the peak of headline inflation. The question now facing markets and the government alike is: was September’s copycat reading of 3.8% still the peak or is there a delayed fuse?
A soft inflation report will change the landscape for monetary policy for the remainder of the year. The softer read may even encourage the BoE to consider cutting rates when it meets early next month. Beyond the headline level, the BoE is likely to be encouraged by the composition of the September inflation publication, with softness observed in the prices of food and some services. These elements, as we have previously covered, are more closely watched by the Bank as they are more indicative of the state of UK consumers and demand-pull inflation in the UK economy than other elements which dependent upon external and exogenous factors.
As we covered yesterday, the undershoot in inflation will be welcome news for the Treasury. It will only be the tip of the iceberg for Chancellor Reeves, however, a cooler inflation print will at the very least serve to not add further pressure for now on central government’s interest repayments. There is room for a dovish repricing of GBP rates based upon yesterday’s publication. In fact, we saw some of the softness created from the inflation publication within Sterling endure throughout yesterday’s session. However, the budget will remain the key risk for GBP and a major repricing of UK rates will likely be deferred until after the budget landscape is known later on in November.
Discussion and Analysis by Charles Porter
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