UK Inflation Rate Softens from 4.6% to 3.9% in November

Highlights

• The UK annual inflation rate softened from 4.6% to 3.9% in November.
• Softer-than-expected inflation numbers could allow the Bank of England to begin discussions around interest rate cuts.
• Later today, US consumer confidence numbers could influence sentiment toward the Fed rate path.

UK Inflation Report Questions the Bank of England’s Stance on Interest Rates

On Wednesday, UK inflation was in the spotlight. The numbers were significant for the Bank of England. On December 14, three Monetary Policy Committee members voted for a 25-basis point interest rate hike. Bank of England Governor Andrew Bailey continued pouring cold water on interest rate cut discussions.

However, the UK annual inflation rate softened from 4.6% to 3.9% in November. Core inflation eased from 5.7% to 5.1%, while holding well above the BoE’s 2% target. Economists forecast annual and core inflation rates of 4.4% and 5.6%, respectively.

According to the Office for National Statistics,

• The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), increased by 4.2% year-over-year in November vs. 4.7% in October.
• Transport, recreation & culture, and food & non-alcoholic beverages contributed to the softer annual inflation rate.
• Significantly, the annual inflation rate for food & non-alcoholic beverages eased from 10.1% to 9.2% in November.
• Services remained the driving force behind inflation. The CPIH all services index increased by 6.0% year-over-year compared with 6.2% in October.

UK Inflation Impact on BoE Policy Goals and the UK Economy

The larger-than-expected pullback in inflationary pressures could instigate discussions about interest rate cuts. Nonetheless, an elevated interest rate environment affects borrowing costs and disposable income. Downward trends in disposable income impact consumer spending and the UK economy.

UK private consumption contributes more than 60% to the UK economy. A weaker consumer spending outlook would increase the chances of a UK recession.

The Bank of England continues to walk the tightrope, tackling inflation while attempting to limit the impact on the UK economy. The inflation numbers could ease pressure on the UK economy. However, the Bank of England may want to see a further easing in inflation before taking a more committed stance on interest rate cuts.

The GBP/USD Reaction to the Inflation Report

Before the UK inflation numbers, the GBP/USD rose to a high of $1.27345 before falling to a low of $1.27103.

In response to the UK inflation figures, the GBP/USD rose to a high of $1.27091 before sliding to a low of $1.26548.

On Wednesday, the GBP/USD was down 0.49% to $1.26698.

Up Next

Later in the Wednesday session, US consumer confidence figures need consideration. The markets expect the Fed to cut rates below 4.5% in 2024. An upward trend in consumer confidence could force the Fed to reconsider its FOMC projections.

Economists forecast the CB Consumer Confidence Index to increase from 102.0 to 104.0 in December.