Inflation spike ‘raises questions’ over health of UK economy

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The spike in inflation to 2.6 per cent today has raised questions about the health of the UK economy, according to analysts.

The news comes ahead of the Bank of England’s meeting to decide the path of interest rates tomorrow, with markets agreeing that combined with higher-than-expected wage growth yesterday, a cut is off the table.

“Having fallen to just 1.7 per cent back in September, the strengthening inflationary pressures will dismay rate-setters ahead of their meeting tomorrow,” said Jeremy Batstone-Carr, European strategist at Raymond James.

The latest uptick in inflation was largely driven by price falls in fuel and underlying goods prices in November 2023 dropping out of the annualised calculation.

Meanwhile, higher fuel prices, combined with price increases in clothing, second-hand cars and recreation, also helped to drive inflation up.

One of the worst offenders has been the price of renting, which is rising at more than seven per cent annually and 0.8 per cent in just the last month – nearly 0.3 percentage points more than forecasts from Deutsche Bank.

Scott Gardner, investment strategist at Nutmeg, noted that this was the second month in a row that inflation had increased, “further raising questions about the current health of the UK economy as we move into 2025”.

It wasn’t all bad news for the Bank of England, though, as core inflation, which which excludes volatile goods like food and energy, came in slightly below expectations of 5.1 per cent, at exactly five per cent.

Neil Birrell, CIO of Premier Miton, actually said the government and Bank of England would be “pleased” that inflation issued no surprises, after matching the path markets had predicted.

After higher-than-expected wage data yesterday, markets had ruled out hope of a cut to interest rates tomorrow, meaning that 2024 will end with the Bank of England having slashed rates just twice.

“Attention will now focus on retail sales, particularly over the key Christmas period, which will give guidance on how the consumer sector is holding up,” said Birrell. “The outlook for the economy remains on a bit of a knife edge.”

“Looking further on, the UK inflation trajectory will be complicated by the demand boost from the Budget at the end of October after the Government relaxed fiscal rules,” noted Daniel Calasi, chief investment strategist at Evelyn Partners.

“The hike in the National Minimum Wage and Employers National Insurance (both from April) and their impact on encouraging producers to raise prices to maintain profit margins is another consideration for the BoE.”