November will see rate decisions from both the U.S. Federal Reserve and the Bank of England. In the wake of relatively benign inflation data, interest rate reductions are almost a foregone conclusion. The European Central Bank cut by another 0.25% on 17th October.
The background is clearly disinflationary. UK inflation at the CPI level fell to 1.7% in September, down from 2.2% in August. However, if one pays a little more attention to reading between the lines rather than what is actually on them, UK ‘core’ inflation stands at 3.2%. It did fall from 3.6% in August but it is still well above the Bank of England’s 2% target. The media and rate setters appear transfixed with CPI but this measure doesn’t include mortgage payments, housing costs or council tax. Consequently, how much use is it? Furthermore, if ‘core’ inflation’s purpose is capture what is really going on under the surface, shorn of volatile fuel, food etc, why virtually ignore it? After all, it’s named ‘core’ for a reason.
As we have mentioned previously, our view is that the U.K. economy is now more inflation prone and that is before accounting for potential aggravations such as a Northern Hemisphere cold snap this winter or perhaps the new government raising a plethora of taxes and duties while funding inflationary pay awards that don’t deliver any productivity improvement whatsoever.
