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Investment Institute
Market Alerts

UK Reaction CPI inflation reaches a decade high, adding pressure on BoE

  • 15 December 2021 (5 min read)

Modupe Adegbembo, G7 Economist at AXA Investment Managers, comments on the UK CPI inflation release:

  • CPI inflation jumped to 5.1% (y/y) in November from 4.2% in October – a new 10-year high.
  • Inflation is set to increase further still, peaking above its current level in Q2 2022 and easing thereafter.
  • The surge this month was driven by clothing and transport which contributed around two-thirds of the 0.9ppt rise in the annual rate.
  • Inflation continuing to surprise to the upside is likely add pressure for the MPC to begin a cautious hiking cycle. We expect the decision to be finely balanced, but given the strength of recent prints, we expect the a December Bank rate rise to 0.25%.

CPI inflation jumped to 5.1% (y/y) in November from 4.2% in October. The reading came above both our own and consensus estimates this month (consensus 4.8%). This marks the highest level of inflation since 2011. CPI inflation has increased by 3.1 percentage points in four months, the fastest gain on record. Core CPI inflation (excluding food, energy, tobacco and alcohol prices) also rose to 4.0% (from 3.4% in October), also ahead of the consensus forecast. Core inflation now also stands at its highest level in over 20 years. RPI measures of inflation also rose sharply, RPIX to 7.2% and its highest level since 1991.

Increases in clothing, used cars and fuel prices drove the increase in the price level. Clothing added 0.3ppts to the 0.9ppt rise in annual inflation. This reflected increased discounting in November last year that was not repeated this time around. In addition, transport, driven primarily by second-hand car prices, which have increased by close to 30% on the year, and motor fuel costs added 0.3ppts to the rate of change. Food prices also surprised on the upside, adding 0.1ppts to the headline figure.


The peak is yet to come. In the short-term headline CPI should dip from November’s print. The resumption of more usual Xmas discounting in clothing prices and softening in oil prices feeding into petrol costs should see inflation slip next month. However, more broadly we expect inflation to increase further in the coming months, particularly as utility prices rise sharply in the next OfGem price cap adjustment due in April 2022. This threatens to raise CPI inflation above our forecast of 5%.

Today’s print reaffirms the pressures on the Bank of England to increase interest rates to quell potential second round effects of price increases. However, the uncertainty on the near-term outlook is high as result of Omicron and the impact that Plan B restrictions will have on the economy. Given the continued inflationary pressures in the economy, we expect the MPC to take a cautious first step to tighten policy tomorrow, increasing Bank Rate by 0.15% to 0.25% whilst guiding the importance of the evolution of Omicron on the path of future rate rises.

Initial financial market reaction saw sterling rise against both the US dollar and the euro.


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