UK Inflation Hits Eight-Month High, but Services Inflation Holds Steady

British inflation surged to an eight-month high in November, reaching 2.6%, as reported by Reuters. However, the rise in services prices, a key indicator of underlying inflationary pressures closely watched by the Bank of England (BoE), remained steady at 5.0%, offering some respite to the central bank.

The November inflation rate, the highest since March, marked a significant increase from October's 2.3% figure. This further distanced inflation from September's 1.7%, the first time inflation had dipped below the BoE's 2% target in almost three-and-a-half years.

"Another consecutive monthly rise in inflation, reaching its highest level since March, underscores the persistent price pressures within the UK economy," said Martin Sartorius, principal economist at the Confederation of British Industry, to Reuters.

Despite the headline inflation jump, the BoE's preferred measure of underlying price pressures, services inflation, held steady in November. Economists polled by Reuters had generally anticipated a slight increase to 5.1%, though the BoE itself had projected a dip to 4.9%.

The central bank, moving at a more deliberate pace than some of its global counterparts in cutting borrowing costs, is expected to keep interest rates on hold at its upcoming meeting on Thursday.

The BoE remains concerned about persistently strong wage growth, with recent data showing pay increases exceeding expectations. Additionally, the new government's planned tax increases for employers and increased public spending are expected to contribute to higher prices. Some economists predict headline consumer price inflation could reach 3% by 2025.

The BoE's own November projection, published six weeks ago, had estimated consumer price inflation at 2.4%.

James Smith, an economist with ING, suggested that services inflation might remain around 5% for the next few months. However, he noted that this could change as annual inflation-linked adjustments to phone and internet service prices are implemented in the coming months.

"These are often tied to past rates of headline inflation which, through 2024, has been pretty benign," Smith stated to Reuters. "Those annual price hikes for various services should therefore be less aggressive next April than we saw earlier this year."

The increase in headline inflation was broad-based, with the most significant contributions coming from transport, particularly petrol and car purchase costs. These increases were only partially offset by smaller rises in air fares and dining out costs.

The BoE has signaled its intention to proceed cautiously with interest rate cuts despite indications that the UK economy is losing momentum.

The ONS reported that its measure of core inflation, excluding energy, food, alcohol, and tobacco, rose to 3.5% in November from 3.3% in October. Factory gate price data showed that prices charged by manufacturers increased by 0.3% in monthly terms, the highest increase since April, echoing hints of inflationary pressure observed in recent business surveys.