Hi Friend,
Latest inflation figures were released on Wednesday. Inflation CPI basis eased to 4.6% in October from 6.7% prior month. The fall was marginally better than the expected 4.7%, boosted by the adjustment to energy prices and the Ofcom cap, as we explained last week.
The effect was a near 22% drop in energy prices year on year and a 1% plus drop in the headline inflation rate. Without this the government would be unable to claim credit for "halving the inflation rate". Unable to move on to the next objective, later this week, to stimulate "growth".
What exactly Sunak and Hunt have done to achieve the halving objective is largely unclear. "VAT on children's clothing, I've scrapped that. VAT on food, I have scrapped that as well. VAT on protective boots for PMQs, I have scrapped that too. VAT on flights to Rwanda under review." Who could ask for more from Downing Street?
Goods inflation eased to 2.9%. Service sector inflation, remained disturbingly high at 6.6%. Insurance costs continue to rise at over 20%. Food inflation was 10%. The underlying inflation rate was down to 5.7% from 6.1%.
Producer price trends remain in negative territory. Output prices fell by -0.6%. Input prices were down by almost 4%. Oil prices sterling adjusted were down by almost 10% year on year.
So good news on producer prices and goods inflation. Not quite so good on service sector inflation. The latest earnings data present additional cause for concern. The latest data for September suggest earnings growth was 7.9% year on year from from 8.2% prior month. (based on the 3 month average). Public sector earnings were 8.6%. Private sector earnings were 7.7%. Service sector pay growth was over 8%.
The jobs market is tightening slowly. Vacancies have fallen from a peak of 1,300,000 in May last year to 957, 000 in the latest three month period to October. The unemployment rate is probably running at 4.5% into the fourth quarter, with an unemployment level of just over 1.5 million.
According to experimental figures released by the Office for National Statistics Office last week, the unemployment rate was 4.2% in Q3 unchanged from the prior quarter.
The jobs market is tightening, but average earnings at 8% is just not compatible with a 4% inflation target, let alone the 2% inflation mandate. The Bank of England will look for a slow down in earnings growth into the early part of next year, if inflation targets are to be met.
So What Happens next?
Inflation is expected to average 4.5% in the final quarter of the year, then slowing to 3% by the end of 2024 according to the latest forecast from the Bank of England. This assumes a steady glide path through the year ahead. Let's hope so ...
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