The consumer price index (CPI) rate of inflation held steady at 2.4 per cent in October, according to the UK Office for National Statistics (ONS), confounding economists’ expectations of a rise.
It comes one day after the ONS recorded the largest increase in wage growth for more than 10 years, rising by 3.2 per cent during the three months to September.
Large downward contributions to the CPI figure came from food and non-alcoholic beverages, clothing and footwear, while the largest upward contribution was seen in transport where prices rose by 5.3 per cent in the year to October 2018, largely related to motor fuels.
Other smaller upward contributions came from items in the miscellaneous goods and services, recreation and culture and communication sectors.
CPI over 5yrs
Source: Office for National Statistics
Although it has moderated from the very high levels seen earlier this year, inflation remains well above Bank of England’s 2 per cent target, with the outcome of a Brexit deal weighing heavy on CPI.
“Inflation is still above target, but tolerably so for the moment,” said Laith Khalaf, senior analyst at Hargreaves Lansdown. “The effect of weaker sterling has faded, but rising fuel and energy prices have taken up the baton in keeping inflation elevated.
“Wage growth is at its highest level since 2008, which suggests domestic inflationary pressures might start adding to the mix too.
“Brexit is still the elephant in the room when it comes to the future path of inflation, and consequently of monetary policy,” added Khalaf. “That is because the pound now waxes and wanes with the Brexit negotiations, and that has a big impact on how much UK consumers pay for imported goods.”
As the Hargreaves Lansdown analyst noted, a disorderly Brexit would see sterling fall and inflation rise, which might further result in a rate hike or a cut by the Bank of England.
His views are shared by Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, who believes the outlook for UK inflation will be governed by two key elements: the ability of the UK government to negotiate a successful Brexit deal and the outlook for oil prices.
Despite soaring to a four-year high of $86.74 per barrel in early October, crude oil Brent prices have fallen by 25 per cent during the past four weeks.
The Organisation of Petroleum Exporting Countries (OPEC) have also recently warned that a supply glut could emerge in 2019 as the world economy slows and rivals increase production more quickly than expected.
Crude oil Brent price over 3 months
Source: Hargreaves Lansdown
“Brexit is almost impossible to call but with oil we know that US sanctions on Iran will remove supply from the market and as a result the recent slump in oil should begin to reverse,” explained Wells.
“In any case, as UK consumers know all too well, pump prices always go up when crude prices rise but we hardly ever see immediate falls in pump prices when crude weakens.”
Sterling reacted by losing a little value after the publication of the inflation figures, following a rocky few days for the currency as investors continue to anticipate a Brexit deal.
“Sterling has had a choppy few days but, on the whole, it has been rising on optimism that a final deal can be agreed upon,” said Helal Miah, investment research analyst at The Share Centre.
“The stock market today is down more in sympathy with global stock market’s fear that an economic slowdown may be coming as oil prices had their biggest fall yesterday for some time, but the fact that inflationary pressures have not increased in the UK left the FTSE 100 to bounce off its session lows.”
Miah added: “In the short term the currency and the stock market will be more focussed on Brexit than underlying economic fundamentals, but the recent data releases suggests that the UK economy is ticking along relatively well given the circumstances.”
With wage growth reaching its highest level since 2008, Alistair Wilson, head of retail platform strategy at life insurer Zurich, said inflation data suggests workers can enjoy a little more breathing space following months of squeezed pay packets.
UK average weekly earnings excluding bonuses annual growth rates, seasonally-adjusted (January-March 2006 to July-September 2018)
Source: Source: Office for National Statistics
“In the short-term at least, this delivers a boost to spending power that will be welcome just before Christmas,” Wilson said.
Yet, the data could also signal that another rate rise is likely in the coming year following its first real rate rise in August.
“More signs of rising domestic inflationary pressure, alongside continued signs of a tight labour market suggest the Bank of England will raise rates again once we are through this batch of Brexit uncertainty – assuming we actually get an approved and ratified withdrawal deal,” said Melanie Baker, economist at Royal London Asset Management. “For now, we still expect a rate rise in May 2019.”