UK CPI reinforces BOE’s gradual

Is the cost of living crisis back?

The cost of living crisis is back. Energy prices surged last month and UK inflation was broadly higher in October. The headline index rose by an estimate-busting 2.3%, up from 1.7%. Core price growth was also stronger than expected, and service prices also rose back to the 5% handle. This was a bleak, but not entirely unexpected report. The energy price cap rose by 10% last month, so a large headwind to energy price growth was expected. 

However, the up tick in service prices was unexpected and this could seal the deal on the Bank of England remaining on hold when they meet next month. Service sector inflation was volatile last month. Airfares rose along with accommodation costs. However, if you stripped them both out of the index then service price growth fell on the month. It is very unusual for airfares to rise in October. The BOE is on the look out for new sources of inflation. If airfares start rising during typical off-season months, this could be the start of a worrying trend. For any of us with children of school age, we’ll recognise the October rise in the price of flights as half term high price gouging. 

The market has had a fairly mild reaction to the UK CPI. The pound is up slightly vs the USD, bond yields are higher, but the 2 year yield, which is sensitive to interest rate expectations, is only higher by a couple of basis points for now. The FTSE 100 is extending gains it made earlier. The interest rate futures market has been pricing in the probability of quarterly rate cuts for 2025 for a while now, and it never seemed entirely convinced that a rate cut in December was possible. Added to this, plenty of BOE speakers have discussed the need for the central bank to take their time and adopt a gradual rate cutting schedule. The question now is whether the market starts to scale back  the prospect of quarterly rate cuts next year. Right now, we don’t think that will happen. The BOE will want to see more inflation data to see if the rise in airfares was a blip or the start of a trend. Also, energy prices are out of the BOE’s control. Large jumps in energy prices makes rate cuts more necessary as it erodes consumer power. Thus, watch out for new sources of inflation in coming CPI reports, as they will determine what the BOE does next. 

Financial markets are in risk mode on Wednesday as Tuesday’s bout of risk aversion fades from the market. Fears of a nuclear attack by Russia on Ukraine appear to be overdone, after Russian President Putin said that he would be open to discuss a cease fire. This is something President elect Trump has proposed, so 2025 could be a year of big change for geopolitics. 

Overall, we think that the news from Russia will dictate market sentiment during the European session. An end to the war in Ukraine could also be good news for long term energy price stability in Europe, which is much-needed, as today’s UK CPI shows. 

Tonight the focus will shift to Nvidia’s results. Watch out for our coverage later. Analysts have an $8bn range in forecasts for revenues for last quarter, so we expect the numbers to cause big market moves later tonight.