Morning Market Brief November 21, 2024

UK economy sees higher inflation

Like Canada, the UK’s annual inflation rate increased in October. While widely expected, it came in above expectations. Inflation remains a risk to the UK economy despite trending downward, which has kept the Bank of England (BoE) on a relatively cautious path of lowering interest rates. And the UK economy seems to be on unsteady footing after data showed it contracted in September.

• The annual inflation rate in the UK increased to 2.3% in October from 1.7% in September, climbing above the BoE’s 2% target. According to a Bloomberg survey, economists were expecting a 2.2% annual rate. The core inflation rate, which excludes more volatile items, inched higher to 3.3% in October.
• The growth in services prices accelerated in October over September. Higher services prices have been a major contributor to inflationary pressures in the UK. Household electricity and gas prices declined but at a slower pace than in the previous month, in response to a price cap from the Office of Gas and Electricity Markets.
• Just before October’s rise in inflationary pressures, the UK economy pulled back. UK gross domestic product shrank by 0.1% in September, which was its first decline since April 2024.
• A preliminary estimate showed the UK economy grew by just 0.1% over the third quarter, down from the 0.5% increase in the previous month.
• The BoE expects the new government’s policies to increase inflation in the short term, but help support higher economic growth in about 12 months.

The BoE must strike a delicate balance between keeping inflation around its target without hindering economic growth. Given its outlook and current inflation data, the BoE could hold back from cutting rates at its final meeting of the year on December 19.

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