The latest UK data released by the ONS this week showed that UK CPI fell to a 20 month low in November. The headline reading rose 2.3% over the month, in line with expectations and down from the prior month’s 2.4% increase.
Meanwhile, core inflation, which is the reading the BOE pays most attention to, rose just 1.8%, again in line with expectations, though down from the prior month’s 1.9% reading.
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The key driver behind the weakness in inflation has been the heavy slump in oil prices, which have come off more than 30% since their year to date highs earlier in the year. While this latest reading, which shows core CPI now trending below target, won’t be welcomed by the BOE, it does paint a positive picture for UK consumers.
The latest wage data released last week showed that year on year in the 3 months to October, wages grew 3.3%, well above the inflation rate, pointing to a much better standard of living. This, alongside lower fuel prices due to the fall in energy markets, will be a relief for many given the protracted period of time where wages were well below inflation.
Consequently, if wages continue to outperform into next year, this could translate into higher core price pressure which should, in turn, bring inflation back up and allow the BOE to pursue a path of policy tightening next year.
Inflation has been a key topic over recent weeks after the BOE warned about the two-way risks from Brexit. If the UK were to leave the EU without a deal, this could have serious repercussions for the UK economy and would cause massive capital outflow sending GBP plummeting which, in turn, would send inflation spiraling higher.