The Bank of England caught another break on Wednesday with an unexpectedly favorable UK inflation report. But it’d be a stretch to suggest things are going the bank’s way.
The last two years were nothing short of a catastrophe for the BoE, which was compelled to grapple not only with the post-pandemic inflation, but also with the macroeconomic fallout from Russia’s invasion of Ukraine and a short-lived fiscal crisis during Liz Truss’s fleeting stint as prime minister.
Never before was the BoE’s public approval rating negative. Last year was a first in that regard. Beginning early in 2022, respondents to the bank’s quarterly survey of public attitudes began to deliver net negative verdicts while assessing the way the bank is “doing its job to set interest rates to control inflation.”
The net satisfaction balance (i.e., the proportion satisfied minus the proportion dissatisfied) remained in negative territory in the latest survey at -14%. The low was -21% in August.
It’s been nearly two years since the British public was satisfied with their central bank. Until very recently, the UK was an outlier among developed economies in terms of the inflation trajectory.
But maybe it’s darkest before the dawn. Headline CPI printed just 3.9% for November in the UK, data released on Wednesday showed. That represented another big decline atop October’s preordained (i.e., mechanical) drop. Consensus expected 4.3%.
On a MoM basis, prices fell 0.2% versus expectations for no change. Core price growth, at 5.1% YoY, was likewise below consensus (5.6%).
Fuel played a role, but as ING’s James Smith wrote, the disinflationary impulse “seems to be fairly broad-based at first glance.” “We’re seeing discounting across the board on consumer goods, from clothing to household goods, and cars,” he added.
Food price inflation in the UK, which at one harrowing juncture neared 20%, is now back in the single-digits.
The BoE kept rates on hold last week for a third meeting following 14 consecutive increases. The forward guidance from the December policy statement plainly indicated the bank’s done raising rates (notwithstanding the three dissents in favor of another hike), but the MPC tried to emphasize the necessity and likelihood of a long stay at terminal. Needless to say, Wednesday’s data emboldened market bets for cuts.
Note that services inflation receded to 6.3% in November. That’s still far (far) too high, but it was the second-coolest read in a year. Goods inflation fell further, to 2%.
The lower the services reading goes, the more confident policymakers can be in the idea that self-fulfilling wage-price dynamics (i.e., domestic price pressures) are abating.
At one point Wednesday, the market priced nearly five BoE rate cuts for next year. “That’s maybe pushing it,” ING’s Smith remarked. “We still think the [BoE] will prefer to tread a little more cautiously with 100bps of cuts starting in August.”
Whatever the case, the data was yet another excuse for bond bulls to push the envelope. Gilts rallied. It was also an excuse for the Sunak government to celebrate. “With inflation more than halved we are starting to remove inflationary pressures from the economy,” Jeremy Hunt said, alluding to the government’s stated (and, ultimately, achieved) goal of cutting the pace of headline inflation in half by year-end.
I suppose this goes without saying but it’s far too early to do any real celebrating. Still, as BMO’s Ian Lyngen and Ben Jeffery put it, the UK CPI figures added to “a developing perception that global monetary policy has finally emerged victorious in the battle with inflation.”
