UK Inflation Jumps to Eight-Month High Amid Fears of Stagflation

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(Bloomberg) — UK inflation rose to an eight-month high in November, adding to fears that the economy will enter the new year burdened by so-called “stagflation” — anemic growth and stubbornly high price rises.

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The consumer prices index increased 2.6% annually, from 2.3% in October, the Office for National Statistics said on Wednesday, driven up by motor fuel and clothing prices. 

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“There is almost no chance of the Bank of England delivering an early Christmas present with another interest rate cut tomorrow,” said Paul Dales, chief UK economist at Capital Economics. This week’s data, which included the first acceleration in wage growth in more than a year, “mean that the Bank won’t be able to worry less about inflation for a while yet,” he added.

Markets have effectively ended any expectation of the BOE reducing rates at its final meeting of the year on Thursday. Only two cuts are expected in 2025, down from three at the start of the week. The pound edged marginally lower, trading around $1.269.

Services inflation — closely watched by BOE rate-setters for signs of lingering pressures — remained stubbornly high at 5%. The BOE had expected 4.9%.

The figures reinforce stagflationary fears which threaten a major headache for Prime Minister Keir Starmer. His Labour government promised to boost living standards and expand the economy at the fastest rate of any Group-of-Seven country, but GDP is moving in the opposite direction, contracting for two consecutive months.

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“Combined with the recent stalling in growth, it paints a picture of a UK economy battling to escape the clutches of stagflation,” said Tom Stevenson, investment director at Fidelity International.

Living Costs

November’s CPI print brings back memories of the cost of living crisis. It was the first back-to-back increase in the annual inflation rate in over two years when price growth peaked above 11%. Goods inflation — the main driver of the post-Covid price spike — rose to 0.4%, turning positive for the first time since March.

“I recognize the cost of living crisis continues to bite,” said Chancellor of the Exchequer Rachel Reeves, commenting on the latest inflation numbers. She said the government had increased the minimum wage and frozen fuel duty in its October budget to help families cope.

The budget also included more than £40 billion ($50.8 billion) in tax hikes, however, which businesses have said will weigh down on wages and investment.

Rising costs from taxes, regulations and the minimum wage “cannot simply be absorbed, despite retailers’ best efforts, and will inevitably lead to price rises, job losses and more empty stores” said Kris Hamer, a British Retail Consortium director.

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The BOE sees inflation edging closer to 3% by the third quarter of next year as the government’s tens of billions in extra spending reinforces the inflationary effect of last year’s fall in energy prices dropping out of the CPI equation.

UK households also see inflation rising to 3% over the next year, the first increase in expectations since 2023, according to a BOE survey.

Home-grown inflation pressures could combine with a more uncertain global environment next year. All eyes are on US President-elect Donald Trump who has promised to ramp up tariffs and reset trade relations. BOE policymakers have singled out protectionism as a key risk to the inflation outlook.

—With assistance from Constantine Courcoulas.

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