November 2023 monthly update

Read our November monthly update – a roundup of the latest financial news and economic headlines.

UK inflation falls to 4.6%

Britain’s inflation slowed down sharply to 4.6% which is better than economists expected. The Financial Times reports that this is due to a decrease in energy prices and the change has allowed Prime Minister Rishi Sunak to declare that he has met his objective of halving the rate of price rises by the end of this year. As such, the year-on-year rise in the Consumer Prices Index (CPI) was below the 6.7 per cent recorded in September 2023 and even lower than the 4.8% previously predicted.[1]

This is a two-year low and the headline CPI was flat on a monthly basis. Core CPI (which excludes food, tobacco, alcohol, and energy) fell from 6.1% in September to 5.7% in October. The Office for National Statistics (ONS) revealed that the sector with the largest downward contribution was housing and household services; the annual CPI rate here was the lowest since records began in January 1950. Similarly, food and non-alcoholic beverage costs further helped to ease inflation since the annual rate for these have fallen to their lowest since June 2022.[2]

Although, the decline has not translated to retail prices going down for consumers – they are only rising less rapidly than predicted. The statistics are nonetheless expected to calm worries that the Bank of England will increase interest rates again this year, despite the inflation rate being double its target of 2%. “In January I made halving inflation this year my top priority … Today, we have delivered on that pledge,” announced the Prime Minister, harkening back to his January target of halving inflation from the 10.7% average held in the last quarter of 2022.[3]

The Labour Party have warned the government against celebrating too early because two years of skyrocketing prices have still left “working people worse off with higher mortgage bills, prices still rising in the shops and inflation twice as high as the Bank of England’s target.” As evidence, the Guardian cites the ONS’ report that the cost of food is 30% higher than it was in October 2021.[4]

Suren Thiru, economics director at the Institute of Charted Accountants in England and Wales, believes that the steep drop implies that the country has “turned the corner” in the battle against inflation but concedes that the halving in inflation has little to do with government measures. He said: “this owes more to the downward pressure on prices from falling energy costs and rising interest rates than any government action.” He also predicts following declines in the inflation rate to be more modest. However, the drag on demand from the jobs market and high interest rates could lead to inflation falling to the Bank of England’s 2% target far more quickly than currently expected.[5]

The sudden shift in the inflation rate brought up the dilemma of whether benefits should be cut. Usually, working-age benefits are reviewed in April using September’s figure – 6.7% in 2023 – but Chancellor Jeremy Hunt was expected to seek to save £2bn annually by appraising benefits by the 4.6% recorded in October.[6] Treasury insiders claimed this suggestion was under “active discussion” but charities condemned the notion as “indefensible” since it could lead to major issues for struggling families.[7] Even many Conservative Party MPs went on record to oppose such measures. Paul Johnson, director of the Institute for Fiscal Studies, said that it would inflict suffering on “some of the poorest” in society.[8]

In the Autumn Statement, the Chancellor quelled these fears by confirming that most benefits and Tax Credits will increase by September’s CPI of 6.7%.[9]

Moving on to inflationary figures, the main cause of its decline in October was that the energy price cap for the average citizen’s annual gas and electricity bill has fallen from the monumental figure of £2,500 in October 2022 to £1,923 in October 2023. This also reflects lower wholesale gas prices. Even though the price of food rose briefly this March to 19.2% (the highest annual rate for more than 45 years), it has since calmed down to 10.1%; helping to drag the headline number lower. Restaurant and hotel prices played a huge part in driving inflation this year but have remained the same between September and October 2023 unlike the 1% rise seen between the same time period a year ago.[10]

Further figures from the ONS reveal that UK house prices fell by 0.1% in the year to September. This is the first annual drop in 11 years and means that the average house sale value fell from £292,882 (in August) to £291,385. These figures include cash buyers also. Alongside this, private tenants were squeezed by a 6.1% average rent increase in the 12 months leading to October – the highest annual percentage change since ONS began its records in January 2016.[11]

As expected, shares on the stock markets rose after the announcement of the larger than expected fall in the UK’s CPI. The FTSE 100 index increased by almost 1% to 7,502 which reinforced hopes by investors that the Bank of England will begin to cut interest rates earlier than predicted; possibly even as early as May of next year.[12]

Despite all of this positive news, Britain’s inflation remains one of the highest when compared to other leading economies. The CPI of the United States of America fell from 3.7% to 3.2% while that of France fell to 4.5% and Germany declined to 3%.[13] Overall, eurozone inflation has decreased to 2.9% as well. At the very least, the easing price growth across the major economies adds evidence to the hope that the central banks’ tightening cycle is coming to a close.[14]

Retailers warn PM risks fuelling inflation with Brexit red tape

The UK’s biggest retailers have warned Prime Minister Rishi Sunak that his high taxes and approach to Brexit red tape could extend the country’s cost of living crisis well into 2024. They have also stated that their hopes of cutting inflation next year have been brought under question since the cost of doing business is still too high.[15]

Chancellor of the Exchequer, Jeremy Hunt, presented his Autumn Statement last week but a number of the measures he laid out were met with chagrin from the British Retail Consortium (BRC) as they believe the policies risk adding to the battle against inflation. The BRC’s statistics show that inflation has fallen before 2023’s Christmas shopping season even though it had soured to a 41-year high last autumn. Annual shop price inflation has eased for the sixth month in a row from 5.2% in October to 4.3% in November. It should be noted that this does not mean that prices in shops are going down, just that they are not increasing quite so rapidly.[16]

According to the BRC, the “hidden costs” of complying with post-Brexit rules have caused businesses great difficulty in keeping prices down. Helen Dickinson, chief executive of the BRC, stated: “retailers are committed to delivering an affordable Christmas for their customers. They face new headwinds in 2024 – from government-imposed increases in business rates bills, to the hidden costs of complying with new regulations.”[17] Dickinson argues that these issues, combined with the biggest rise to the ‘national living wage’ in record are likely to stall or even reverse the progress made in bringing down inflation. She also noted that this was likely to affect the price of food most of all.[18]

In order to meet Sunak’s target of halving inflation by the end of 2023, Hunt argued in the Autumn Statement that the government had needed to take “difficult decisions”. Official figures show an optimistic view of this succeeding somewhat – inflation has decreased from a peak of 11.1% in October 2022 to 4.6%% in October 2023. The BRC countered by claiming that the cost of several measures outlined in the Autumn Statement are likely to be passed onto the public in the form of higher retail prices.[19] Furthermore, the institution calculates that the Chancellor’s decision to keep a planned increase in business rates from April 2024 will cost companies £400m – this is in spite of some breaks for smaller businesses.[20]

Martin Sartorius, principal economist at the Confederation of British Industry, echoed this sentiment: “Retailers had hoped the chancellor’s autumn statement would offer a reprieve from next year’s hike in business rates. While prioritising relief for SMEs and key sectors is understandable, many retailers are being left to contend with another increase in costs at a time when they are least able to afford them.” As such, sales have consistently stayed in negative territory for much of this year because of the impact of strained household finances on the retail sector’s upkeep.[21]

Bank of England governor, Andrew Bailey, is similarly pessimistic. He stated that the potential for Britain’s economy to grow was among the worst he had witnessed in his lifetime. As such, he warned that interest rates would not be cut in the “foreseeable future” and urged against any premature celebration or declarations of inflation being beaten.[22]

Meanwhile, the chairman of the Office of Budgetary Responsibility (OBR), Richard Hughes, told MPs that Hunt’s Autumn Statement poses a “very big fiscal risk” due to the major public spending cuts the government are hoping to implement. Hughes told the Treasury Committee that the OBR is finding it “very difficult” to determine the credibility of the government’s spending plans because after March of 2025, “the government doesn’t have any spending plans.”[23]

The Treasury retorted that it was helping businesses by cutting taxes on investments as well as extending business rates relief for over one million business properties. “It is thanks to our action that we’ve achieved our target of halving inflation this year, but we are continuing to stay the course to get inflation all the way back down to 2%,” a spokesperson stated. “The OBR have confirmed that our policies will reduce inflation next year while boosting growth and rewarding people for their hard work.”[24]