Inflation in the UK dropped to 10.7% in November, down from its high of 11.1% the month prior, according to the latest data by the Office for National Statistics (ONS).
This was largely driven by a slower rise in the price of fuel, with costs increases dropping from 22.2% in October down to 17.2% last month.
However, restaurant and hotel prices offset some of November’s easing, increasing from 9.6% to 10.2% throughout the month.
Transport and motor fuel inflation over the past decade
Source: Office for National Statistics
Indeed, the cost of food and non-alcoholic beverages continues to be a laggard for the consumer prices index (CPI), with costs up 16.5% over the past year.
Although this morning’s data gives some glimmer of hope that inflation is on its way down, rates are still at their highest point in more than 40 years and the UK faces more problems in tackling it than its neighbours, according to Hugh Gimber, global market strategist at JP Morgan.
Europe’s inflationary issues are driven primarily by a surge in energy prices since the war in Ukraine, while the US will need to tackle the tight labour market to bring wage growth down.
“Unfortunately for the UK, the economy is being hit by US-style wage pressures and a European-style energy crisis, all at the same time,” Gimber said.
Consumer price index over the past decade
Source: Office for National Statistics
The UK may have more hurdles to jump before taming inflation to a reasonable level, but November’s results could encourage the Monetary Policy Committee ahead of their meeting tomorrow.
Gimber anticipates a 0.5 percentage point increase to interest rates tomorrow, down from initial forecasts of 0.75 percentage points.
Still, hiking the rate to 3.5% tomorrow is still far from the 4.5% that Gimber says the Bank needs to reach next year, and the central bank could be delaying the inevitable.
He said: “While this will create some short-term headwinds to growth, more decisive action now would likely prevent the Bank from needing to hike rates much more aggressively at a later date.”
However, Rob Morgan, chief investment analyst at Charles Stanley, said that an aggressive rate hike is not needed for the time being, with tighter consumer spending naturally dampening inflation.
“Raising interest rates too much would lead to more of an economic downturn than necessary,” he said. “In his autumn Budget last month, chancellor Jeremy Hunt confirmed that the UK is in recession and this, in itself, is likely to hold inflation back as demand cools.”
Inflation should diminish over the next year, but markets could remain volatile as companies’ earnings come under scrutiny, according to Morgan.
November’s lower inflation rate is a positive sign, but investors should remain vigilant over the coming months.
Morgan said: “Bonds are looking more attractive as an investment than they have done for more than a decade, particularly safer investment grade corporate debt which should re-establish its traditional role in a portfolio.
“Equities should also benefit from lower rates, but their resilience will be shaped by the outlook for the economy which may not be rosy.”
Despite today’s positive news, there has been little movement in markets, with the FTSE All Share index down 0.4% today.
Chris Beauchamp, chief market analyst at IG Group, said that this is because the Federal Reserve’s (Fed) interest rate decision still “squats menacingly in this evening’s schedule”.
The central bank rose rates by 0.75 percentage points at the last meeting, but Jerome Powell signalled that future hikes could be less aggressive.
Many analysts anticipate a 50 basis point rise ahead of December’s meeting, but another 75 basis point rise is still on the table.