Hotter Than Expected UK Inflation Adds Weight to the Case for a November Rate Increase
British prices are picking up speed again. September consumer price inflation, released by the Office for National Statistics on the 21st, rose 3.5% from a year earlier, a sharp jump from 3.1% in August. It exceeded the 3.4% consensus of economists compiled by The Wall Street Journal and was the highest level in 11 months, since last October.
Fuel drove the increase. The statistics office said the transport sector, particularly motor fuel, made the largest contribution to the rise in prices. The average gasoline price in September was 169.5 pence per liter, up 8.2 pence in a month and the highest since August 2022. The rise in international energy prices caused by the war between the United States and Iran reached British fuel pumps directly. Falling restaurant and hotel prices held back part of the increase.
What the central bank watches more closely is the innards of inflation. Core inflation, excluding food and energy, rose to 2.8% from 2.6%, and services inflation, into which wages and energy costs readily seep, also rose to 3.7% from 3.4%. Producer input prices, the prices companies pay for raw materials, also rose 8.3% from a year earlier on the surge in crude oil prices, and pressure to pass costs on to consumer prices is building.
The Bank of England held its benchmark interest rate at 3.75% last month. The next decision comes on Nov. 5. Financial markets are pricing in a probability of nearly 96% that the Bank of England will raise the rate by 0.25 percentage point to 4.00%, InvestingLive reported. The Bank of England itself, in last month's outlook, projected inflation of around 3.75% in the fourth quarter of this year and above 4% early next year. David Rees, an economist at Schroders, told The Wall Street Journal that Britain faces a perfect storm of imported price pressures and that food and manufactured goods prices will rise further, bringing the inflation rate closer to 4%.
Right after the release, the pound showed little movement around $1.3365 and London stocks were weak. Lenders are already raising rates on fixed-rate mortgage products, so households' interest burdens are growing even before the policy rate decision is made.
Not just London's story
The government's arithmetic runs against the central bank's. British government borrowing in September, released the same day, came to 24.52 billion pounds, exceeding expectations. Chancellor of the Exchequer John Healey has a budget announcement next week. The government, which needs cheap money to revive the economy and manage the public finances, and the central bank, which must raise rates to rein in prices, are facing each other head-on.
The scene is not unfamiliar across the Atlantic. U.S. consumer prices rose 3.7% in September, higher than Britain, and the widespread view is that the Federal Reserve, after raising rates last month, will hold at next week's meeting. In France, anger over the cost of living spread last weekend into nationwide protests and looting, 2,400 arrests and curfews in some cities. Reuters described it as the worst unrest in years.
The three countries share the fact that an energy shock produced the inflation, but their responses are diverging. If the Bank of England actually raises rates in November, it will also send a signal to other central banks that the fight against inflation is not over yet. It is a signal in the opposite direction from the expectations of households and markets that have been waiting for an era of rate cuts.
