Inflation Slows, but Economic Headwinds Stay

UK Inflation: From Wild Rides to a Smoother Journey

Quick recap: The UK’s inflation rollercoaster has finally started to settle after a dizzying year. Below you’ll find the fresh stats and what they mean for us.

Inflation at a Glance

Peak in October 2022 – 11.1 % (yes, that’s a rush!)
Current month October 2023 – 4.6 % (wow, that’s a calm breeze now)

What’s on the Horizon?

Economic watchers are buzzing that inflation might dip below the 2 % target by mid‑next year. If that happens, banks may think we’re almost back on track.

But Wait… Inflation ≠ Price Slowing

Even though inflation is easing, the actual cost of living is still on a high parabola, thanks to a recent surge over the past few years. In plain English:

Consumer prices today are roughly 22 % higher than they were in January 2020.
That means you might still feel your wallet tightening, even though the rate panels are ticking down.

Bottom line: Falling inflation is hopeful, but the price tag doesn’t go away just yet. Keep your shopping lists ready—just in case the grocery aisle still feels pricey.

The baton passes from inflation to growth

Why Markets Are Throwing a Party for Inflation and Growth (and Some Debt in the Background)

For a while now, the global financial crowd has been trying to decide what on earth to put the spotlight on. Should they stare at infinite price‑level trends or focus on the sluggish beat of economic growth? The latest chatter, from the U.S. to the U.K. and the euro zone, suggests the agenda is a mash‑up: keep inflation… core inflation tight, but also whisper about growth, because the heat of policy tightening is burning hot.

After a few fireworks of fresh inflation data that didn’t quite match what traders had figured out, the buzz turned more to growth fears—so patients that the market is now craving an answer on when those stubborn rates will drop.

Things that Matter Right Now

Inflation’s Core Path: Still on the radar as a key seabed that eventually provides a stable grip on pricing.
Growth Concerns: The headline that shines brighter when the economy feels the squeeze of tightening policy.
Rate Cutting Timeline: A countdown that’s becoming the new barometer of investor mood.

2024: The Year of “Moderate” Rate Dips

Financial supervisors and investors alike suspect that along the western shores—both the U.S. and the European Union—interest rates will start to ease around this year’s tail end. It’s not about a dramatic collapse, just a gentle lift that keeps the money flowing but doesn’t go overboard.

Picture this: ports of banks, offices, and cafés watching the charts and muttering, “Finally, I hear the breeze.” It’s a subtle shift, still taking place in the background of corporate earnings and emerging market patience.

Peek Into the Future

While growth warnings loom large, markets seem ready to hand the reins over to the policy wheel—hopefully making the hand‑shake smoother and avoiding a wild stall. It could look like a gentle descent of rates rather than a roller coaster drop.

In short, for 2024, investors are bracing for a soft lowering/steady rate trend that could gently steady the financial coolness, all while still keeping a wary eye on growth.

The US sets the tone

What’s Really Happening With Inflation and Fed Policy?

After the last FOMC meeting, the Fed kept the target rate steady between 5.25 % and 5.5 %. Since then, the jobs market has slowed, and the consumer price index (CPI) has ticked up more gently.

Monthly CPI Numbers—The Good, the Bad, and the Average

May: 0.1 % rise
June: 0.2 % rise
July: 0.2 % rise
August: 0.6 % jump
September: 0.4 % increase
October: no change (and that’s a relief for markets)

The annual CPI is now 3.2 %. The Fed’s own 2 % target hinges on the Personal Consumption Expenditures (PCE) index, which is running at 3.4 % year‑over‑year. Both CPI and PCE look like they’re about to smooth out, pretty much confirming what we’d called a “disinflationary” environment.

Core Inflation—The Heart of the Matter

When we strip out food and energy, core CPI climbs 4 % and the core PCE deflator grows 3.7 %. Because of the noise in these data sets, the Fed isn’t going to swing their policy to a “dovish” stance just yet. Instead, they’re keeping their cool, recognizing that inflation will ease but still remain elevated.

Will the Fed Cut Rates? A Market Forecast

Investors are pricing a first US rate cut in May and a total of four cuts over the coming year, aiming for a level around 4.25 % by the end of 2024. In the UK, folks expect the first cut of 0.25 % in June, and rates to settle between 4.5 % and 4.75 % by year‑end.

Why the US and UK are Moving Differently

The U.S. sees a sharper inflation shock, largely because of strong domestic demand and a relaxed fiscal stance. The U.K. and Euro‑area dynamics are different but still paint the same picture: inflation has peaked, will slow dramatically, and might dip below the 2 % target in 2024 before creeping back up to around 3 % in 2025 and beyond.

Global vs. Domestic: The Two Tides of Inflation

For the past 25 years, global forces—globalisation, weak wage shares due to declining union power, a booming financial sector, and technology—have kept inflation down. Now, two of those forces have shifted.

Globalisation has turned into fragmentation. Companies aren’t just moving where costs are lowest; they’re also considering supply‑chain risks, fostering friend‑shoring and on‑shoring.
Wage shares have started to bounce back. Climate change pressures are bringing wages back up, which might ripple into second‑round inflation concerns—more so in the U.K. than the U.S.

Artificial intelligence could further tighten the disinflationary grip, but the other dynamics are now less intense.

Monetary Policy Still Plays a Key Role

In the U.K., the recent inflation surge was triggered both by supply‑side shocks and loose monetary policy. Thankfully, both issues are now curbing themselves, which is why the Bank of England is wary but cautiously encouraging a path past this inflation flare‑up.

Bottom line: Inflation’s at a high point, it’s set to decelerate, and the U.S. and U.K. central banks are balancing the need to cut rates just enough to stay comfortable without rolling back the gains made during the pandemic.

UK rate cuts back on the agenda – but not for some time

Catch the UK Economy’s Roller‑Coaster Ride

Picture this: the UK’s inflation trail has markedly slowed, and wages are finally sprinting ahead—once again outpacing price spikes. That’s great news for real incomes, but the story isn’t all sunshine.

Who’s Really Feeling the Lift?

People on the higher side of the income scale tapping into the post‑pandemic savings wave have felt a safety cushion.
However, the once‑stormy savings tide has largely traded its excess; most households no longer have that backup to weather the cost‑of‑living storm.

High Prices, Low Hopes

Even though inflation numbers are easing, price levels are still screaming “break‑even” for many. Many of us expect falling inflation to mean falling prices, but that’s not the case—unless petrol takes a dip, which hinges on a softer oil market.

Economic Precautions: The Downside Outlook

Growth’s getting a bit sluggish; a recession is possible. Here’s the raw data:

GDP grew a sliver 0.3% in Q1, 0.2% in Q2, and nothing in Q3.
Monthly GDP was up 0.2% in September, following a 0.1% rise in August.
Professional and financial services were solid performers, but consumer‑facing services dragged—down 0.2% in September and 0.7% in August.

Three Trouble‑Topping Factors

Composite Purchasing Managers’ Index at 48.7 in October (still below 50, the “no‑growth” line).
Money & credit on a negative swing. M4 lending fell 2.7% YoY; M4 monetise down 4.2% YoY in September.
The lingering bite of past monetary tightening hasn’t fully penetrated the economy.

Answering the Autumn Statement Clock

With demand sluggish and inflation easing, there’s a strong case for pulling the trigger on income tax cuts. But the Chancellor’s eyes may also be on the supply side—forever‑lasting full expensing for firms, for instance.

What the Numbers Say About Future Moves

Interest rates have peaked. Expect a drop to 4.75% in the second half of next year.
Policy will stay steady for now; cutting rates too soon might re‑ignite inflation.
Bond markets are likely over the bear‑phase territory.

Expect a fresh fiscal kick in the March Budget and inflation to slide well below the 2% target by summer.