The market expected Mark Carney to avoid it but it was just not meant to be.
The BoE Governor will suffer the ignominy of a bizarre tradition of having to write a letter to the Chancellor of the Exchequer explaining why UK inflation is more than 1.0% above the target of 2.0%. The market had expected the UK CPI to rise by a modest 0.2% month-on-month, taking the year-on-year rate up to 3.0%. Instead the month-on-month rate hit 0.3% pushing the annual rate to 3.1%, its highest rate since March 2012.
As Bloomberg writes, "U.K. inflation unexpectedly accelerated to the fastest in more than 5 1/2 years in November, forcing Bank of England Governor Mark Carney to explain why price growth is so far above target. Consumer prices rose 3.1 percent from a year earlier, driven by the cost of air fares and computer games, the Office for National Statistics said on Tuesday. That’s up from 3 percent in October and the highest since March 2012."
The latest reading means Carney is now compelled to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.
Rising costs of airfares along with petrol and energy prices were expected to have been offset by an easing in food and clothing price pressures, the latter helped by seasonal promotions. However, the price of computer games rose more than expected and higher chocolate prices saw food and non-alcoholic drink prices rise 4.1% versus November 2016, the highest level since 2013.
After the announcement, Sterling briefly spiked to 1.3375 before being sold off to 1.3332, which is slightly lower on the day. The one piece of good news in the release was that core CPI for November came in at 2.7% higher than a year ago, in line with consensus. Furthermore, the latest report might be the peak, with both the headline and core rates declining as we go through 2018. On that note the, the Financial Times provided some analyst feedback.
Lucy O’Carroll, chief economist at Aberdeen Standard Investments:
It’s quite possible that inflation is now close to its peak. But some of the latest surveys suggest that service sector costs and prices are rising. Given how dominant services are in the economy, this could feed through to inflation overall. That means that further interest rate rises are definitely not off the table. The Bank of England has a tricky tightrope to walk. Too much inflation could threaten the Bank’s credibility and therefore its grip on the economy. But they need to keep consumer spending, the engine of the UK economy, chugging along too. If inflation keeps creeping up, or remains elevated, then the chances of the engine sputtering rise incrementally.
Sam Tombs at Pantheon Macroeconomics:
November’s inflation rate should represent the peak. We expect CPI inflation to fall back to 3.0% in December, as food inflation moderates temporarily and airfares inflation slumps. Then in early 2018, CPI inflation will fall sharply as the anniversary of last year’s huge sterling-related increases in core goods prices is reached. So provided the recent pickup in oil prices doesn’t gather momentum, we expect CPI inflation to return to the 2% target by the end of 2018, enabling the MPC to wait around 12 months before raising interest rates again.
So, we might have seen the peak in UK inflation, but only as long as we don’t see another lurch downward in Sterling or a continued spike in oil prices. That might provide some relief for long-suffering British citizens where real incomes have been under pressure for most of the last decade.