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26 Nov 2024 | 3 minutes to read
UK inflation data last week jumped by more-than-expected in October with the latest Consumer Prices Index (CPI) print higher than the Bank of England's (BoE) 2% target, further calling into question the pace of interest rate cuts.
Consumer prices rose by an annual rate of +2.3% in October, up from +1.7% in September, mostly because last year’s large energy price falls dropped out of the annual calculation and the energy price cap increased in October.
The Office for National Statistics (ONS) said that from September to October core inflation, which excludes more volatile elements such as energy, food, alcohol and tobacco, picked up to +3.3% from +3.2%, while services inflation - which the BoE views as a key measure of domestic inflation pressures - rose to +5.0%.
When considering further interest rate cuts, last week Governor Andrew Bailey reiterated the Bank’s “gradual” approach saying policymakers expected headline inflation to hit +2.4% and +2.5% in November and December, and head towards +3% in the second half of 2025. Inflation concerns have mounted recently, with some businesses warning of price rises to cover taxes announced in the Budget and facing potential tariffs on trade with the US following Trump’s re-election.
Last week the ONS also reported two other important data points. First, that UK public finances had worsened with government borrowing at a much higher-than-expected level in October, driven by higher debt interest payments and public sector pay rises. Borrowing rose to £17.4bn last month against economists’ expectations of c.£12.3bn. Second, that UK retail sales volumes fell by -0.7% in October with households and businesses being cautious on spending decisions before the Budget. However, retail sales in the three months to October were in fact up when compared to the previous three months – suggesting a slightly more positive trend.
Nevertheless, more underwhelming data underscores the difficulties Chancellor Rachel Reeves is facing to keep the economy and public finances stable, following flat economic growth figures the previous week. Protesters abound: thousands of farmers in London were angry at proposed changes to Agricultural Property Relief, and 82 retail business CEOs signed an open letter to the Chancellor from the British Retail Consortium highlighting “significant concerns about the impact of the Budget on the retail industry and the economic consequences for inflation, employment and investment.”
President-elect Trump continued to nominate cabinet members with Howard Lutnick positioned to lead the US Commerce Department – a strong advocate of some of Trump’s more controversial plans, including on tariffs and trade. Another priority for Lutnick will be the US’s business relationship with China.
Elsewhere, Trump has nominated long-time Wall Street financier, Scott Bessent, for the highly influential position of Treasury Secretary, and Pamela Bondi, Florida Attorney General, to lead the Justice Department. Bondi previously represented Trump as a lawyer in his first impeachment trial.
President Biden last week gave Ukraine permission to use its long-range Army Tactical Missile Systems (ATACMS) inside Russian territory, despite previously refusing to say that it would significantly escalate tensions with President Putin. Moscow confirmed that a ‘new phase’ had begun in the war. The price of gold, perceived as a ‘safe haven’ asset, rose in response, together with the oil price.
The German economy grew by +0.1% in the third quarter versus the second quarter of this year, narrowly avoiding a technical recession. However, economists are suggesting that the coming months might get tougher. On an annual basis, German Gross Domestic Product (GDP) fell by -0.3%, while Purchasing Manager’s Indices (PMIs) - which may be leading indicators of economic activity – were in contractionary territory. Given that growth also contracted by -0.3% in the second quarter of the year versus the first, the latest data appears to confirm a stagnant German economy.
Looking ahead, there appears no immediate catalyst for a German economic revival. The expected policies of the new US administration (principally trade tariffs and protectionism) combined with continued Chinese consumer weakness could continue to weigh on growth. Chancellor Olaf Scholz’s government will face a confidence vote on 16 December after the coalition fell apart. Since Scholz is running a tight majority, he may reasonably expect to lose, paving the way for an election on 23 February, seven months earlier than originally expected.
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