Market report: UK inflation falls by more than expected, adding to relief wave
- UK inflation falls to 4.6% in October, a bigger jump down than expected.
- Euphoria wave from lower-than-expected core inflation in the US still ripples out.
- Brent Crude is hovering close to $83 a barrel, gaining ground on optimism about the US economy.
- Xi JinPing and Joe Biden meet in San Francisco amid slightly more positive Chinese data.
Susannah Streeter, head of money and markets Hargreaves Lansdown:
‘Investors have a spring in their step, as hopes rise that the fight against inflation is gaining ground. The wave of euphoria which washed over Wall Street, after softer than expected data on prices rises, is still lapping over indices, and the FTSE 100 looks set for positive early trade after UK inflation also dipped by more than expected in October, taking a big step downwards. Some better-than-expected data on the Chinese economy should also provide support for commodity focused stocks.
UK inflation takes a big jump down.
UK inflation has made a bigger than expected jump down in its difficult descent, but it may still become stuck in the mud of viscous wage growth in the coming months. While this dramatic drop means inflation has hit the target promised by Rishi Sunak, its arguably not what the government has done but monetary policy driven by the Bank of England which is showing up in these figures. The impact of pent-up demand from the pandemic has dwindled and supply shocks caused by the war in Ukraine have also eased off. The energy price cap was cut in October, which as expected has fed directly into the figures, and the price of used cars has also fallen back. There’s also been an tailing off in the annual rate of food and non-alcoholic drink inflation. Prices rises for vegetables have eased considerably, falling from 14.4% to 10.8%. There is finally cheer for crisp lovers, with the snacks falling in price falling by 3.4% month on month. It’s enough to burst open a bag in celebration.
But the party may be short-lived. At 4.6% inflation is more than double the Bank’s target and so the prospect of cuts are still a very dim and distant hope. The Bank must get to grips with stopping domestically-fuelled inflation in its tracks and with wage growth stubborn, the higher for longer mantra is being repeated. Although core inflation is heading in the right direction, falling 6.1% to 5.7%, risks remain. The Bank’s Chief Economist Huw Pill, speaking at the Festival of economics in Bristol said it would require ‘ “persistent restrictiveness” in policy so painful borrowing costs are set to linger. However, at this stage another interest rate rise looks unlikely given the Bank will want to wait for the lag effect of previous hikes to take effect.
Softer US inflation data buoys oil and stocks
Oil prices have edged up again, although remain way off the levels reached at the end of September, as traders hope for a soft landing for the US economy and were encouraged by slightly better Chinese economic data. Brent crude is hovering around $83 dollars a barrel, helped by the jolt of optimism that the Federal Reserve is done with hiking rates, after underlying inflation, core CPI, came in lower than expected. Now more bets are being placed on cuts to interest rates coming in the Spring. The upbeat sentiment looks set to continue to provide a tailwind to trading later on Wall Street. It’s also helped bring down the yields on 10-year Treasuries, to the lowest level in seven weeks, which in turn makes financial conditions a bit looser. Higher longer-term borrowing costs were part of the vice grip the Fed has been assessing as the recipe to bring down demand in the economy. So, there is a chance that stronger-than expected growth will persist, reducing the chances of early cuts to interest rates.
Joe Biden and Xi Jinping meet amid more positive Chinese data.
Joe Biden and Xi Jinping meet amid the latest skirmishes in the chip wars, and trade is set to be top of the agenda. China is weighed down by a sluggish economy and a fragile property market, on the edge of implosion, so another ramping up of protectionist policy would be far from welcome. There are some glimmers of hope emerging from the latest economic data out today, with industrial production at a 4-month high, rising 4.6% in October, beating forecasts of 4.4%. Efforts to try and stimulate consumer demand finally appear to be paying off with retail sales accelerating to 7.6% year-on-year in October, again surpassing expectations. This is encouraging but it’s still set to be a slog to sustainably restore more buoyant growth, so any hints of rapprochement in terms of China/US trade will be well received.’’
