The October inflation data has just been released in the UK and the data is largely in line with market consensus – that means no nasty surprises that could have raised doubts over the ability of the MPC to cut the key policy rate in December. There were five key events between the November and December MPC meetings that would be key to determine the decision in December. Two CPI and employment reports and the budget, next Wednesday. We’ve had two of the four reports with wage growth also decelerating, consistent with scope to cut in December.
The headline CPI YoY rate slowed from 3.8% to 3.6% in October, slightly higher than the 3.5% expected. The core rate was in line at 4.5% (vs 4.6% prev) while the services YoY inflation rate fell 0.2ppt to 4.5%, weaker than the 4.6% expected. The largest contribution to the slowdown in inflation in October came from housing and household services which includes utility bills for gas and electricity. The annual inflation rate for gas fell from 13.0% last month to 2.1% in today’s data, reflecting the base effect with the MoM increase in October 0.9% compared to 11.7% in October 2024. There was a similar favourable base-effect for electricity prices. Rents also continue to slow with actual rents showing a drop in the YoY rate from 4.3% to 4.1%. The rate stood at 5.8% in June.
The BoE’s measure for underlying services (excluding volatile components, rents and travel) increased slightly based on our calculations from 3.9% to 4.0%. However, given the broader data was clear in showing further disinflation, we doubt this slight tick higher would have much impact on an MPC decision to likely cut in December. The chart on UK inflation highlights the sharp drop in the 6mth annualise core rate, which tends to lead the annual core rate lower. The 6mth annualised core CPI rate fell to 2.6% in October, the weakest print since August 2021. Of course we still have another jobs report and CPI report and in that regard no strong conclusions on a definite rate cut in December can be made. Still, the OIS market implies an 80% probability of a 25bp rate cut in December which also reflects an expectation of a budget next week that contains tax hikes and measures to reduce household inflation pressures further.
The data today leaves us comfortable with our view of a December rate cut and this report provides important reassurance of the BoE projection that the inflation rate likely peaked in September at 3.8%, 0.2ppt lower than expected. Front-end yields in the UK can fall further but not be much ahead of the budget and two more key data releases in December. That will limit GBP reaction ahead of the budget next Wednesday.
UK 6MTH ANNUALISED CORE CPI FALLS SHARPLY SIGNALLING FURTHER DECLINES IN ANNUAL RATE AHEAD
Source: Macrobond, Bloomberg & MUFG Research
