"The near-term outlook for prices is now more mixed"
The latest UK inflation data for September was released by the Office for National Statistics (ONS) last week, disclosing that the overall Consumer Prices Index (CPI) rate unexpectedly remained at 6.7%, ending three consecutive monthly declines. This clearly exemplifies that the battle with inflation is still at play, and at 6.7% remains the highest of any major advanced economy.
An increase in motor fuel prices during the month was a prime contributor preventing a decline in the rate. Meanwhile, the largest downward contributors during the month were food and non-alcoholic beverages, where prices fell by 0.1% on the month for the first time since September 2021, according to ONS, led by soft drinks and dairy produce.
Lead Economist at the Confederation of British Industry (CBI) Alpesh Paleja commented on the data, “Inflation has once again surprised on the upside by staying put in September. While we expect it to resume falling in the months ahead, the near-term outlook for prices is now more mixed. The recent rise in global oil prices may mean that the path back down is bumpier.”
Looking ahead, with the next Bank of England (BoE) Monetary Policy meeting in early November, Paleja added “It’s unclear if today’s data calls time on further rate rises, but either way, it’s still very likely that interest rates are close to their peak, with the stance of monetary policy now judged to be restrictive. The Bank has signalled that rates are unlikely to be cut anytime soon.”
Policymaking “reset” required according to think tank
Last week the Resolution Foundation said the British government should consider increasing the Bank of England’s inflation target from 2% to 3% in the future. Saying a policymaking “reset” was required. Research Director at the Resolution Foundation James Smith elaborated, “This reset would ensure we can support the economy in bad times and fix the fiscal roof when the sun eventually arrives.” The report from the leading think tank highlighted that reform of the BoE and Treasury’s economic toolkit was required to avoid years of rising debt or austerity.
Forecasting faux pas
The Office for Budget Responsibility (OBR) is due to publish the next set of economic forecasts alongside Jeremy Hunt’s Autumn Statement on 22 November. However last week the financial watchdog, in its Forecast Evaluation Report, admitted to making ‘genuine errors’ in its March 2021 and March 2022 forecasts by underestimating the impact of the pandemic and the invasion of Ukraine. OBR stated that the intensity and ramifications of price spikes, and state support schemes, had been overlooked and it had also ‘overestimated the level of economic activity’. Accordingly, the government borrowed over £29bn more in 2022-23 than the OBR had predicted in March 2022. Although ‘unforecastable shocks’ impacted the accuracy of the forecasting, the OBR acknowledged, ‘some differences are due to genuine errors, which would have been corrected before the forecast was finalised if we had spotted them.’
Warm weather impacts retail sales and consumer confidence takes a tumble
ONS statistics released on Friday showed the joint warmest September on record had a knock-on impact on retail sales, as people chose not to purchase colder weather attire as temperatures held firm. Economists had expected a 0.2% fall in sales volumes last month, however a 0.9% reduction was reported. While sales of non-essential goods were subdued, fuel sales rebounded, registering 0.8% growth in the month, following a 1.0% fall in August. Food sales also improved, rising 0.2% in September.
Consumer confidence has taken a tumble in October according to the latest GfK monthly measure, as households become more anxious about the prospects for the economy and their personal finances. The overall index gauge of consumer optimism fell to a three-month low of -30 in October, down from September’s reading of -21. Client Strategy Director at GfK, Joe Staton commented on the decline in confidence, “This sharp fall underlines that the cost-of-living crisis… the fierce headwinds of meeting the accelerating costs of heating our homes, filling our petrol tanks, coping with surging mortgage and rental rates, a slowing jobs market and now the uncertainties posed by conflict in the Middle East, are all contributing to this growing unease.”
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All details are correct at time of writing (25 October 2023)