16 November 2023: Inflation tumbles as predicted


  • Headline CPI fell to 4.6% in October
  • Retail sales fell in October as rate hikes took hold
  • The European Union cuts its growth forecast, but doesn’t expect a recession
GBP – Market Commentary

Rate cuts return to the agenda

In every developed economy, the responsibility for monetary policy is the sole duty of the Central Bank and, in those economies, the Central Bank is independent of Government.

It was therefore difficult to understand how Prime Minister Rishi Sunak pledged to halve inflation by the end of this year when he came to power a little over a year ago, and even more curious that he felt able to claim any responsibility for having fulfilled his pledge.

The headline rate of inflation, which reached a high of 11.1% in October of last year, fell to a low of 4.6% when the latest figures were published yesterday.

One of the most prominent reasons for the fall was the fact that the meteoric rise in energy prices at this time last year is no longer a factor in the data.

Headline inflation is now at its lowest level for two years.

While this can be claimed as a triumph by the Bank of England and its programme of interest rate hikes, no credit is due to the Government for the fall in prices.

The Market now believes that inflation is firmly on a downwards trajectory, and barring any unforeseen events it could reach 3.6% by next Spring.

This is clearly the forecast that Huw Pill, the Bank’s Chief Economist, was using as a guide when he commented recently that the market’s view that interest rates could be lowered as soon as the second quarter of next year was “reasonable”.

Central Bankers, in general, are a conservative group and are usually unwilling to predict good news for the economy for fear of being “hoist on their own petard”.

However, it can now be safely assumed that barring any disasters and Jeremy Hunt not making any inflationary changes to fiscal policy in his Autumn statement that short-term interest rates have now peaked and will begin to be cut following the market’s expectations.

Next year’s rise in the state pension will be almost double the rate of inflation due to the Government’s continued support for the triple lock, and it is rumoured that Hunt will amend other benefits to pay for the increase in pensions.

The pound reacted as predicted to the fall in inflation, but still managed to cling on to more than half its gains made in the previous session.

It fell to a low of 1.2403 versus the dollar and closed at 1.2409.

USD – Market Commentary

Possibility of future hikes falling

The larger than expected fall in headline inflation in October was followed up by a further fall in producer prices, which show the cost of goods and raw materials at the “factory gate” and is a reasonable precursor of future retail prices.

There was evidence of cooling in the economy with the publication of retail sales figures for October, which fell for the first time since March.

The big retailers report that they have noticed a drop-off in consumer activity in the run-up to the Thanksgiving Holiday, which is traditionally their busiest time of the year.

While the fall in retail sales was predicted, the fall was less than the market feared. Sales fell by just 0.1% versus expectations for a decline of 0.3%. Last month, retail sales rose by almost 1%.

Shoppers took a breather from a flurry of activity in the Summer as inflationary pressures fell, and interest rates have begun to bite.

Members of the FOMC have been concerned about a rise in inflation following the good news on that front from data that was published earlier in the week.

With each successive data release, the idea that the Fed may still feel the need to hike rates again becomes more remote. Recent comments are now being treated as further evidence of Central Banker’s conservatism.

A soft landing for the economy is still likely, even if it is still difficult to achieve.

With employment having cooled according to the latest figures and inflation now firmly on a downwards path, even Jerome Powell’s hawkish outlook is beginning to look a little out of place.

It is hard to predict when a soft landing can safely be confirmed, since there is no combination of jobs versus prices data that will confirm that it has been achieved. It will certainly not be declared until the FOMC has paused for the third consecutive month at its December meeting.

The minutes of the October meeting are due for release next Tuesday, in a break from tradition, since their usual release date of three weeks after the meeting takes place, will fall on the eve of the Thanksgiving Holiday.

It is hoped that the hawkish tone that has been clear since the meeting will be better explained, although comments within the minutes are unattributable.

The dollar index made a marginal recovery from its fall following release of inflation data the previous day. It rallied to a high of 104.51 and closed at 104.39.

EUR – Market Commentary

Difficult to see where growth will come from

In an odd set of comments made yesterday, the European Commission lowered its full year growth forecast for the Eurozone to 0.6% from 0.8% previously, but does not see the economy suffering a recession this year.

Given the fact that the economy contracted by 0.1% in the third quarter and data released so far for the current quarter is less than encouraging, it is hard to imagine where the growth will be found to see the economy even flatline, let alone grow in Q4 sufficiently to avoid even a technical recession.

Economist’s obsession with a technical recession is hard to fathom. The standard definition of a recession is two consecutive quarters of economic contraction (negative growth).

It seems a simple premise that an economy is either in recession or it isn’t.

A recession may be considered mild if the quarterly contraction is less than 0.2% or if growth returns after two months of contraction, but it is still a recession. Technicality has no part to play.

The report from the European Commission contained an admission that “efforts to reduce public debt in some of the bloc’s largest economies are losing momentum”, as Governments borrowed heavily during the Pandemic, which was immediately followed by the energy crisis. This was worsened since rates were rising to curb inflation.

This is as close as the EU will ever come to admitting that public spending is out of control.

There was no mention of measures that are planned to counter rising public debt.

It has shown that any return to the Growth and Stability Pact will need to have “teeth” in order to counter the spending plans of countries like Italy, whose recent budget plans are clearly politically motivated.

With the ECB already announcing that there will be no cut in interest rates before the start of the third quarter of next year, it will take a significant contraction in the economy for it to change its collective mind.

The European Commission’s report did say that the economy may rebound next year as inflation eases amid a robust labour market. A continued fall in inflation is likely when looked at on a quarterly basis, but there is still some suspicion that the labour market is not as robust as the figures appear to indicate.

The euro managed to hang on to most of the gains despite the threat of a recession in the region. While the market is still not considering comparative growth, the euro will continue to trade in a relatively narrow range. Any change will almost certainly result in the common currency resuming its downtrend.

It fell to a low of 1.0831 yesterday and closed at 1.0843.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.