Press release

18 Dec 2019 London, GB

Consumer price inflation stable at three-year low of 1.5% in November

While there had been expectations of a dip to 1.4%, stable consumer price inflation at a three-year low of 1.5% is still decent news for consumer purchasing power.

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  • While there had been expectations of a dip to 1.4%, stable consumer price inflation at a three-year low of 1.5% is still decent news for consumer purchasing power. It also gives the Bank of England ample scope to cut interest rates if the economy fails to decisively pick up early in 2020.
  • The MPC adopted a more dovish tone on interest rates at its November meeting when two of the nine members voted for an immediate 25 basis point cut to 0.50%. While consumer price inflation of 1.5% in November is slightly above the Bank of England’s (it forecast it would average 1.42% over the fourth quarter in its November Monetary Policy Report), it is still well below the 2% target level and gives the MPC ample scope to cut interest rates if they feel the economy needs looser monetary policy.
  • November’s modest inflation rate of 1.5% helps keep consumer purchasing power at a decent level – although it has come off the highs seen around July. Annual earnings growth moderated to 3.2% in the three months to October from an 11-year high of 3.9% in the three months to July. While this was adversely affected by lower bonus payments, regular earnings growth (which excludes bonus payments) moderated to 3.5% from a peak of 3.9%.
  • There were few significant movements in the inflation components in November. Core inflation was stable at 1.7%.
  • Price pressures further down the price chain were weak in November, which bodes well for consumer price inflation remaining limited. Producer input prices were down 2.7% year-on-year in November, although this was less than the 5.0% year-on-year drop in October, as they dipped 0.3% month-on-month. Meanwhile, the annual increase in producer output prices weakened to just 0.5% in November (the lowest since July 2016) as they fell 0.2% month-on-month.
  • Consumer price inflation could well edge down lower and it looks likely to remain close to 1.5% through the early months of 2020.
  • Inflation looks unlikely to get back up to its target rate of 2% during 2020, although it is likely to be on a gradually rising trend in the latter months of next year.
  • Relatively low oil prices should help limit inflation. 
  • Meanwhile, domestic inflationary pressures are expected to be limited over the next few months at least by below-trend UK growth, which is likely to constrain companies’ pricing power. Earnings growth is softening after reaching an 11-year high in July. A recently stronger pound is also likely to limit inflation.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

Consumer price inflation was stable at 1.5% in November. It had originally fallen back to 1.5% in October, taking it to the lowest level since November 2016. It was down from 1.7% in both September and August, and an equal 2019-high of 2.1% in August. Inflation has been in a relatively small band of 1.7-2.1% through 2019 so far.

“At 1.5% in November, consumer price inflation was clearly below the Bank of England’s 2.0% target rate.

“There were few significant movements in inflation components in November. Inflation was limited in November by lower hotel prices and cigarette prices rising substantially less than a year ago. Some upward impact came from food (notably chocolate), package holidays and concert tickets.

“Core inflation was stable at 1.7% in November; it had previously risen back up to 1.7% in September after dipping to 1.5% in August (the lowest level since November 2016) from a six-month high of 1.9% in July (when it had been lifted by price hikes for some of the more erratic components, notably consumer games and consoles). Core inflation had previously been locked in a very narrow 1.7-1.8% range from February through to June.

“Inflation had primarily been brought down in October by lower energy prices for millions of people after Ofgem lowered the price cap for electricity and gas prices from October.

Outlook for inflation

“Inflation looks likely to remain close to 1.5% through the early months of 2020, and it could well edge down further. Inflation looks unlikely to get back to 2% until 2021.

“Relatively low oil prices look likely to help limit inflation. We expect Brent oil to average around $58/barrel over 2020 compared to $63.5/barrel over 2019.

“Domestic inflation pressures are expected to be limited over the next few months at least by below-trend UK growth which is likely to constrain companies’ pricing power. Earnings growth has also recently moderated. Annual earnings growth has come down to 3.2% in the three months to October from an 11-year high of 3.9% in the three months to July. While this partly reflected lower bonus payments, it is notable that annual regular earnings growth has come down to 3.5% from 3.9% (earnings growth of 4.0%–4.5% used to be considered consistent with the Bank’s target inflation rate of 2.0%). We suspect that earnings growth is likely to stabilise around or just under 3.5%.

“A recently stronger pound rise in sterling should also have a disinflationary impact. The pound recently traded at its best level since May 2018 against the dollar of $1.3514/£, compared to a 31-month low close to $1.20/£ during August. The pound also achieved a three-year high against the euro.

“Price pressures further down the price chain were weak in November, which bodes well for consumer price inflation remaining limited. Producer input prices were down 2.7% year-on-year in November, although this was less than the 5.0% year-on-year drop in October (the largest annual decline since April 2016) as they dipped 0.3% month-on-month. Meanwhile, the annual increase in producer output prices weakened to just 0.5% in November (the lowest since July 2016) as they fell 0.2% month-on-month.

“Consumer price inflation looks unlikely to get back up to 2% during 2020 – although it is likely to be on a gradually rising trend over the latter months of the year – as GDP growth is below trend over the year as a whole despite an anticipated gradual pick-up in activity as the year progresses. Additionally, an expected firmer pound will help to limit the rise in inflationary pressures.”