CPI past peak as base effects begin to weigh
• Consumer Price Index (CPI) inflation eased to 10.7% year on year (y/y) in November down from 11.1% in October, driven by declines in motor fuels and core goods.
• This reading came below consensus estimates of a decline to 10.9%
• Core CPI declined to 6.3% from 6.5% prior, below consensus estimates of the rate remaining at 6.5% and was driven by declines in core goods prices, core services were unchanged on the month.
• We look for a 50 basis points (bps) hike by the Monetary Policy Committee (MPC) tomorrow. CPI surprised to the downside, but key measures of domestically generated inflation such as services CPI have yet to ease.
CPI inflation eased to 10.7% y/y in November down from 11.1% in October, as falls in motor fuels and core goods prices such as used cars, clothing and recreational items drove the decline. This reading came below consensus estimates of a smaller decline to 10.9%. Core CPI inflation eased to 6.3%, below consensus estimates of Core CPI remaining at 6.5%. Retail Price Index (RPI) inflation eased to 14.0% whilst Retail Price Index excluding mortgage interest payments (RPIX) eased to 13.5%.
The easing in inflation was driven by declines in the transport subsector (-0.2 percentage points [ppts]), driven by declines in the price of motor fuels and second-hand cars. Fuel prices were up 17.2% in the year to November 2022, down from 22% in the year to October. The decline in the price of fuels was principally a base effect with petrol prices unchanged between November and October. There were falls in the price of alcohol and tobacco (-0.1ppts), recreation and culture (-0.1ppts), and clothing and footwear (-0.1ppts). These declines were partially offset by price rises in restaurants and hotels (+0.1). Food inflation also picked up again in November, marking 16 consecutive months of rises, to 16.5%. Core inflation declined to 6.3%, but the 20bps decline was driven exclusively by falls in the core goods inflation, with services CPI remaining at 6.3% – a signal that inflationary pressures are not yet abating.
Inflation has likely peaked, but the descent will be gradual. From here, we continue to expect a slow decline in the headline rate, with upside contributions from food inflation likely to keep the headline above double digits into 2023. The Government’s decision to extend the energy price cap beyond March next year will help reduce inflation over 2023 as a whole. We forecast CPI inflation to average 9.1% in 2022, 7.6% in 2023 and 2.8% in 2024.
We continue to expect the MPC to hike Bank Rate by 50bps in their December meeting tomorrow. The downside surprise in inflation is likely to add to arguments of MPC doves – but inflation remains around multi-decade highs and the slight easing in core inflation was driven by goods prices – with services inflation yet to fall. We pencil in further hikes of 50bps in February and 25bps in March, bringing Bank Rate to 4.25%, but expect the Bank of England to begin unwinding some of these hikes towards the end of 2023, pencilling in one cut in Q4 2023 to 4.00%.
Markets reacted to the downside surprise in inflation with the pound falling towards £1.2345 against the dollar following the release of the data.