Downside inflation surprise won’t stop rate rises (yet)

Commenting on the Consumer Price Index (CPI) published today Melanie Baker, senior economist at Royal London Asset Management (RLAM), said:

"Further falls in UK inflation are likely in coming months. Falls in energy inflation seem very likely into the middle of next year. Core goods inflation (non-energy industrial goods) is also likely to fall further; this is the category where I’d expect to see most impact from factors like improving supply chain problems. The bigger than expected fall in CPI inflation in November, however, will have reflected a variety of factors and not all of them will have sticking power or reflect weaker underlying domestically-driven inflationary pressure.

"Domestically-driven inflation still looks strong. It is difficult to attribute much of the fall in CPI inflation in November to weakening domestically-driven inflation pressures - that is more likely to be a story for later in 2023. Services inflation remained at 6.3%, supported by strong inflation in a number of sub-categories.  Yesterday’s pay data (weekly average earnings) surprised on the upside.

"Meanwhile, this level of inflation remains painful for consumers. The level of prices has risen dramatically this year, especially in essentials like energy and food. Food price inflation remains painfully high, as does energy.

"Still strong inflation in this release – in isolation – supports a further rate hike from the Bank of England this week, though falling headline inflation is arguably consistent with them stepping down the pace a bit to 50bp from 75bp in line with consensus."