UK CPI Preview: Forecasts from four major banks, inflation to ease further

UK inflation likely extended its downward trend in November, with headline inflation falling to 4.3% YoY and core edging down to 5.6% YoY. Services inflation remains the most important for the BoE though, and here we see another decline to 6.5% YoY – a notable 0.4ppts below the BoE's forecast from the November MPR.

Negative base effects should again drag down headline inflation, although to a much lesser extent than in October. Consequently, we expect a 0.4pp fall to 4.6%, with core also down 0.2pp, to 5.5%.

We doubt the November CPI will show enough progress on the inflation front to significantly alter the Bank of England policy outlook. After the sharp October slowdown helped by base effects, the consensus forecast is for headline inflation to ease only modestly further to 4.3% YoY in November. Meanwhile, slower wage growth could also see a marginal slowing in services and core inflation, with the consensus forecast for core CPI inflation to soften to 5.5% YoY. That said, in our view both headline and core inflation remain high enough to dissuade the BoE from contemplating monetary easing for now. Depending on how the inflation data evolve through early next year, it's possible an initial BoE rate cut may not come until as late as the August 2024 meeting.

It looks like services inflation will remain sticky in the near term and we expect it to stay at 6.6% this week and around these levels into early next year. But by next summer, we expect services inflation to be back to the 4% area and headline CPI should be pretty close to target. That’s likely to be a catalyst for rate cuts, and our base case is August for the first move – though if markets are ultimately right that the ECB/Fed hike early in the spring, then the BoE could feasibly move earlier too.