The BoE is rightly signalling a more cautious approach to cutting rates, after Labour’s Autumn Budget. The case for rate cuts was not convincing. The latest inflation data underlined the point. Core inflation (ex-food, energy, alcohol & tobacco) firmed from 3.16% to 3.31% in October, coming in well ahead of expectations. Services inflation firmed from 4.94% to 5.02% in October. The 12-month moving total for the PSNB ex also widened to $126.14bn in October.
The drop in UK labour productivity in Q3 (-1.8% y/y) should be a warning: without a significant improvement in the supply side of the economy, inflationary tendencies in the economy will persist. Particularly with such fiscal largesse. However, Labour’s plans to bolster the supply side, are already coming up against significant obstacles, with the housing minister now warning it will be “more difficult than expected” for the government to meet its target of building 1.5mn new homes over five years.
With landlord instructions falling relatively sharply in October, the continued imbalance between rising tenant demand and dwindling supply will keep rent inflation elevated, making the task of bringing inflation sustainably closer to 2% even more challenging for the BoE. The y/y for the ONS private housing rental index re-accelerated from 8.44% to 8.67% in October. Private medical insurance costs are also climbing sharply, driven by higher demand for private healthcare services, pressure on public healthcare systems and higher levels of claims.
