What’s going on here?
UK prices rose at their slowest pace in two years, so the writing on the wall may finally be optimistic.
What does this mean?
British prices were 4.6% higher this October than last, which plots inflation at twice the Bank of England’s (BoE) target. But Brits will take that: October’s uptick looks tame compared to September’s 6.7%, and marks the slowest pace of increases this year. What’s more, lower energy prices aren’t the only catalyst, with both core – excluding volatile food and energy prices – and services inflation landing lower than economists expected. And the British government will be celebrating, too, finally fulfilling the promise it made in January to halve inflation before the end of the year.
Why should I care?
For markets: Stocks are ready and waiting.
That slowdown didn’t come easily: the BoE pulled interest rates to extreme heights in an effort to curb inflation. So now that prices seem to be letting up, the central bank could consider cutting those rates – or at least leaving them where they are – to support the economy. Investors already believe the BoE will trim rates three times next year, starting from June. And that could help stocks dust themselves off: lower rates plump up the present value of stocks’ future cash flows, giving their valuations a leg up, while also making it cheaper for companies to borrow money and invest in themselves.
The bigger picture: It’ll be a bumpy ride.
Thing is, worldwide events like supply chain kinks and war were partly behind Britain’s price bumps. While that impact has mostly leveled out, the remaining inflation could be harder to budge. And even if prices stop climbing, their current level is enough to pinch workers without inflation-related pay rises. Mix in heating geopolitical tensions and transforming technology, and the takeaway is clear: the end of inflation doesn’t mean the end of volatility.
Originally Posted November 16, 2023 – Last Month’s UK Inflation Reading Was A Work Of Art
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