A catalyst to cut?
Yesterday, at the UK market open, the latest inflation report crossed screens. The headline that you may have seen was inflation falling below 2%. This is the first time since 2021 that headline inflation has fallen below this level. This is all the more significant because, as you likely know, the target for UK inflation set to the Bank of England is 2%. Year on year to September the inflation rate fell to 1.7%, below the 1.9% market consensus. However, the real significance of this inflation report likely lies away from the headline move in this flash estimate of aggregate inflation.
Services inflation is what the Bank of England is paying far more attention to. Services inflation is more illustrative of fundamental price pressures in the economy and strips out volatile elements that impact headline inflation such as changes in utility prices which are heavily influenced by changes in commodity prices. Services inflation was forecast to drop to 5.3% by the Bank of England by year end. Yes, that’s not a typo, inflation in services (excluding other volatile elements such as air fares and rent) really had been expected to remain that high.
Shocking the market and largely responsible for the sharp dive in GBP at the UK market open yesterday, this figure was seen to fall to 4.9%, from 5.6% in August. This adds credibility to the headline statistic of 1.7%, paving the way to lower interest rate expectations. With a November cut of 25 basis points looking like a sure thing, the debate will now turn to whether the Bank follows the Fed in doubling down on the size of policy rate adjustments at future meetings.
Discussion and Analysis by Charles Porter
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