MNI INTERVIEW: Easing UK Inflation Changes Little For BOE

The fall in UK inflation to 10.7% in November from 11.1% in October suggests the headline data may have peaked but signs of domestically-generated price increases and sticky service sector dynamics means there is little to change the outlook for more near-term Bank of England rate hikes, Resolution Foundation senior economist Jack Leslie told MNI.

Leslie, a former Bank of England economist, said the string of upside inflation surprises now appear to be behind us and that it was encouraging that expectations for price increases had dipped, but services sector inflation was always going to be more persistent and the latest data would not prompt any fundamental reappraisal from the BOE’s Monetary Policy Committee, widely expected to hike by 50 basis points on Thursday.

"I don't think it massively changes where they thought the economy would be at this point. I think it is consistent with there still (being) quite a lot of domestically-generated inflation pressure and that is why they are going to continue raising interest rates in the near-term," Leslie said.

While the headline number dipped, service sector inflation held steady at 6.3% on the year to November. While many goods prices are influenced by volatile commodities, service sector prices are driven by labour costs and are a better guide to the domestically-generated inflation that troubles policymakers.

"It is going to be slower coming down than goods price inflation is. I am pretty confident that overall inflation looks like we have got to a peak. Whether that is true in services I am a bit less certain," Leslie said.

WAGE GROWTH

While falling energy prices should help service sector firms at the margins, Leslie expected high nominal wage growth to continue until unemployment starts to rise, with some early signs that labour market pressures are beginning to abate.

"Vacancies have fallen a little bit in the last few months but they are still elevated relative to pre-pandemic ... It is not that labour demand has completely collapsed," Leslie said, adding that the Bank's Decision Maker Panel survey found "that the difficulty in hiring staff has weakened a little bit, but not loads.”

Some MPC members place a lot of weight on inflation expectations, which has declined according to both market-based and the latest household expectation surveys, but Leslie noted that expectations tend to be heavily influenced by recent price behaviour. (See MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts)

"I think lots of those measures of inflation expectations aren't amazing. They don't tell you loads about future inflation," Leslie said. "It is one month's data, particularly on the household side so I wouldn't overinterpret it particularly given that you would have expected the mini-Budget to have pushed up inflation expectations, it certainly did for markets ...and maybe some of it is coming down from that as well."