Surprise fall in UK services inflation may hold key to rate cuts
Airfares and tickets to the cinema, theatre and concerts helped drive down a key gauge of domestic price pressure being monitored closely by the Bank of England.
Services inflation – watched for signs of “sticky” prices – eased to 6.3 per cent in November from 6.6 per cent the previous month, the Office for National Statistics said. It was the lowest annual rate since January.
Air-fare inflation dropped to 3.3 per cent in November from 7.9 per cent the previous month, while train and bus costs also increased by less year-on-year than in October. Nick Morrish/British Airways
The BOE has been concerned that rapid rises in services prices reflect second-round effects as a tight labour market keeps wage growth high.
However, even an underlying measure of services prices that strips out energy-intensive components is on a downward trajectory, helping to fuel mounting bets on interest-rate cuts next year.
“The move in the headline rate of services inflation was driven by an easing in pressure in categories that have lower energy intensity – a gauge that has remained stubbornly high in recent months,” said Dan Hanson and Ana Andrade at Bloomberg Economics. “Our calculations suggest that it dropped to 5.6 per cent from 6.1 per cent in October.”
A cooling in the transport and recreational and cultural services categories were key to the easing in price pressures in the largest part of the UK economy.
Airfare inflation dropped to 3.3 per cent in November from 7.9 per cent the previous month, while train and bus costs also increased by less year-on-year than in October. In recreation and services, the cost of cinemas, theatres and concerts rose by 0.9 per cent, down sharply from a 4.7 per cent annual jump in the previous month.
Elsewhere in the sector, price increases also cooled in restaurants and cafes, hairdressing and even funeral services.
Bets for rate cut by spring
“A softer-than-expected recreation and personal services print contributed almost as much as the miss on transport services,” said Jack Meaning, chief UK economist at Barclays.
“The former is not a subcomponent that is usually described as volatile and we interpret this as corroborative evidence of our view that disinflation is not only gaining traction, but is more sustainably embedding itself.”
The fall in services inflation will put more pressure on the BOE’s higher-for-longer stance on interest rates. On Wednesday, traders ramped up bets on a cut as soon as the spring.
Services inflation is now running well below the 6.9 per cent rise predicted for November by the BOE in its latest forecasts. Goldman Sachs cited services inflation along with slowing wage growth in its decision to move forward its call for the first rate cut to May.
Economists expect services inflation to continue subsiding, pushed lower by the drop in energy prices, the weakening jobs market and lacklustre demand.
“Services inflation and pay growth are still out of line with bringing inflation back to the 2 per cent target,” said Martin Beck, chief economic adviser to the EY ITEM Club. “But services inflation should continue to fall, reflecting the lagged impact of less expensive energy filtering through to services firms and a sluggish economy.”
James Smith, developed markets economist at ING, said services inflation remaining in the 6 per cent region will mean the BOE keeps up their “cautious narrative as we enter the new year”.
“But by the spring, we think the story is likely to begin to change ... Services inflation at 4 per cent next summer seems feasible.”
Bloomberg
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