Written by Shane Balkham.

UK inflation fell to below 5% in October, on the back of a sharp decline in energy costs.  The monthly publication from the Office of National Statistics (ONS) showed a 2.1% drop in UK Consumer Price Inflation (CPI) from 6.7% for September to 4.6% for October.

A significant contributor to this fall was the fall in energy prices; over the year to the end of October, gas prices fell by 31% and electricity prices fell by 15.6%.  Food prices were little changed for October.

This is a positive step bringing inflation back down to the Bank of England’s (BoE) target level of 2%.  There are another three weeks until the Monetary Policy Committee of the BoE meets to discuss the path of UK interest rates, and it remains a delicate balancing act.

The US also had a pleasant surprise for inflation, with a fall greater than expected.  US CPI for October fell from 3.7% to 3.2%, which was marginally below consensus expectations.  The reaction of the US market was one of relief, with US Treasury yields falling and the stock market rallying.

Some commentators believed that this was an overreaction by investors and while inflation is certainly heading in the right direction, there will be challenges ahead.  The US Federal Reserve meets a day earlier than the BoE, with the next decision on interest rate policy coming on 13th December.

It makes sense that the reaction from markets on October’s inflation readings was one of relief.  However, central banks are known for not necessarily doing the right thing at the right time, and although there is optimism that we have reached the peak in the interest rate hiking cycle, we are still treading carefully in our investment decisions.

From policymakers to politics, where the US House of Representatives voted to avert a costly government shutdown last week.  In a similar move to that of six weeks ago, the can has been kicked down the road until early in the new year.  The proposal provides a two-step plan that sets up two new shutdown deadlines next year.  US government funding has been divided into two different parts, with priority given to military construction, transportation, housing, and the Energy Department, which has a new deadline of 19th January 2024.  Anything not covered in this first step would be funded until 2nd February 2024.  Politics will certainly start the New Year in the spotlight and will likely remain there.

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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th November 2023.
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