UK inflation data September 2023 - reaction

Markets were always being too optimistic hoping for inflation to fall to 6.5% in September, especially when oil prices rose to as high as $91 last month. This hasn't been helped by current geopolitical tensions, the risk of oil hitting $100 per barrel, and the recent spike in gas prices. Given that markets were only pricing in a final 25bps hike, the renewed possibility of another couple could now have unfavourable repercussions for sectors such as housebuilders and banks. However, there's still reason to be hopeful. Wage growth in the private sector and in areas that have a more profound impact on inflation such as professional services, has been cooling meaningfully. This should feed into core inflation eventually and alleviate some of the upticks as a result of higher energy prices. Nonetheless, it's going to be a rough couple of weeks as all eyes will be on oil and gas prices moving forward, as they serve to be the main stumbling blocks for inflation on its path back down to 2%.

For the latest inflation data to be unchanged is a worrying sign that the Bank of England Monetary Policy Committee meeting on 2nd November will see a further increase in the base rate. The sticky inflation problem highlights yet again that, post-pandemic, the Bank of England was asleep at the wheel. Threadneedle Street should have expected an uptick of this nature once the lockdowns ended. Sadly the Ukrainian war added further fuel to the fire that we are now all battling with for such an elongated period.

With such a close vote of 5:4 at the last Monetary Policy Committee meeting, this latest set of inflation data means it is highly likely that the balance will tip the other way at the next gathering in November. It has been predicted that another 0.25% would come before the end of the year. The good news, though, is that mortgage rates have been reducing and I fully expect rates to stay stable with lenders already having priced in the extra 0.25% base rate rise.

With inflation holding steady, I would not be surprised to see the Bank of England also do the same at their next meeting and hold rates. While it would have been great to see inflation fall further, so many of the factors that kept inflation up, like oil prices, can't be controlled by the Monetary Policy Committee and with such a lag on previous rises yet to take effect, why inflict more pain on households that are already struggling? It does seem baffling to me that in 2023 we still don't have a better policy tool than simply raising rates until things fall over to quell inflation? Now would be the perfect time for a forward-thinking policy maker or economist to show true innovation, but alas, I don't think we are there yet.

The recent inflation data is not the news we were hoping for, with the Bank of England's upcoming decision on the base rate just around the corner. While some experts are betting on another 0.25% hike, I predict the Bank might just sit tight. Why? Because factors like oil prices are out of their control, and households are already feeling the pinch. It's high time for some fresh thinking in monetary policy, but for now, all eyes are on the Bank's next move.

September's unchanged inflation figure is disappointing, particularly as it doesn't include the Oil price increase caused by the terrible events in the Middle East. It's far more likely now that the Bank of England will increase the base rate in November to 5.5% and rates will stay higher for longer. However, I believe inflation will fall sharply over the next 6 months and we'll see base rate cuts by the spring. Let's hope so.

The Bank of England will likely now vote to increase the base rate by 0.25% next month. With the situation in the Middle East still escalating, I fear this will have huge implications for global oil prices. If Iran were to get involved then we could see a further increase in energy prices. Just as we thought there was light at the end of the tunnel, we hit another major barrier.