CPI rises to 2.6% to extinguish BoE rate of interest reduce hopes as economic system stumbles

Any realistic chance of another Bank of England base rate cut this year was crushed this morning after official data added to fears of an inflationary resurgence.

The consumer price index rose from 2.3 per cent in October to 2.6 per cent last month, according to the Office for National Statistics, as closely watched services inflation continued to prove sticky at 5 per cent.

The rise in CPI, which was in line with market forecasts, hit its highest in eight months and follows a reading of 1.7 per cent in September, when it fell below the bank’s target of 2 per cent.

Market pricing has now all but ruled out any chance of a BoE rate cut on Thursday, with traders now predicting just two cuts of 25 basis points each to come next year.

This would take base rate from its current level of 4.75 to 4.25 per cent at the end of 2025, marking a stark contrast to market forecasts for the US Federal Reserve and the European Central Bank, which investors think will be more aggressive.

Price rises were felt broadly across the British economy in November, with core inflation – which excludes energy, food, alcohol and tobacco – rising from 3.3 to 3.5 per cent.

Bank of England Governor Andrew Bailey weighs slowing economic growth with sticky inflation 

It follows stronger than expected wage growth data published on Tuesday, and weakens the argument for more aggressive rate cuts to counteract slowing economic growth.  

Michael Field, European equity market strategist at Morningstar, said: ‘The explanation for the [CPI] rise in October was down to an increase in the energy price cap, but the fact that inflation continued to rise in November means there is likely more to the story.’

Jeff Brummette, chief investment officer at Oakglen Wealth, warned BoE Governor Andrew Bailey will also need to keep a close eye on how the economy responds to changes announced in the Autumn Budget, which come into effect from April.

He added: ‘Businesses may increase prices to cover the added National Insurance contributions while the overall increase in government spending could impact inflation too.

‘We expect markets will be happy if inflation stays in 2 to 3 per cent range next year, but if it were to inch higher the central bank could find itself back on a rate-hike footing.’

Services inflation holds the key to rate cuts

While services inflation disappointed the BoE’s expectations of a fall to 4.9 per cent, it was below broader market forecasts of a rise to 5.1 per cent.

However, the rate was largely buffered by a massive 19.3 per cent drop in the price of air fares for the month while Britons saw big jumps in housing and household services, restaurants and hotels, and recreation and culture.

Wage inflation is thought to be a key driver of this.

Lindsay James, investment strategist at Quilter Investors, said there ‘are reasons to be optimistic’ that services inflation ‘can be bought under control’, noting a fall in job vacancies and the looming rise in employer national insurance payments as factors that could bring wage growth under control.

She added: ‘While slower wage growth may be unwelcome news for workers, given wages account for around 60 per cent of costs in a typical service sector business, it will help headline inflation return closer to the Bank’s 2 per cent target.’

James Smith, developed markets economist, UK, at ING, said he expects services inflation to ‘bounce around 5 per cent for the next four months or so’, but ‘get pretty close’ to 3 per cent by the spring.

He explained: ‘A lot of the services basket is affected by one-off annual changes in index-linked prices – think of things like phone and internet bills.

‘These are often tied to past rates of headline inflation which, through 2024, has been pretty benign.

‘Those annual price hikes for various services should therefore be less aggressive next April than we saw earlier this year.’

ING expects services inflation to ease towards 3% by the Spring 

This, he said, would push core inflation ‘materially below’ 3 per cent, providing ‘some ammunition for the Bank of England to move a little faster on rate cuts than markets are now pricing’.

Smith added: ‘Our base case is for back-to-back to rate cuts from February onwards, with Bank Rate falling to 3.25 per cent later in the year.

‘For the time being though, today’s data means the Bank will stay the course at this week’s meeting. It’ll keep rates on hold and offer no major hints on what’ll come next, beyond re-affirming its commitment to gradual cuts.’