Housing costs particularly gas and electricity prices lead the rise while recreation and culture prices drop.
Table 1: CPIH, OOH component and CPI index values, and annual and monthly rates, UK, October 2023 to October 2024
The UK’s Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose sharply to 3.2% in the 12 months to October 2024, up from 2.6% in September. This increase marks the first rise in the annual inflation rate since July 2024, signalling that last month’s dip was indeed temporary.
Figure 1: Annual CPIH and CPI inflation rates rise for the first time since July 2024.
Energy Prices Ignite Inflation Upswing
The most significant contributor to the rising inflation rate was the housing and household services sector, particularly electricity and gas prices. In October, the Office of Gas and Electricity Markets (Ofgem) increased the energy price cap, leading to higher energy bills for consumers. Ofgem estimate that for an average household paying by direct debit for dual fuel, this equates to £1,717, a rise of £149 on an annual bill.
- Electricity Prices: Rose by 7.7% in October 2024, reversing a 7.5% decline from the same two month period last year.
- Gas Prices: Increased by 11.7% in October 2024, compared to a 7.0% decrease seen for that period the previous year.
Why This Matters
For traders reading Trader.yt, the surge in energy prices has multiple implications:
- Inflationary Pressure: Rising energy costs contribute significantly to overall inflation, potentially influencing the Bank of England’s monetary policy decisions.
- Energy Sector Opportunities: Higher energy prices can boost revenues for energy companies, affecting stock valuations and investment strategies.
- Consumer Spending: Increased household expenses on energy may reduce discretionary spending, impacting sectors like retail and leisure – October saw a drop in discretionary recreation and culture pricing, more on that next.
Figure 2: Gas and electricity prices rise for only the second time since January 2023.
Recreation and Culture: A Surprising Downward Pull
While energy prices surged, the recreation and culture sector exerted the most significant downward force on inflation. Prices in this division rose by 3.1% in the year to October 2024, down from 3.9% in September, dropping -0.1% on the month compared to a rise of 0.7% a year ago.
Key Factors
- Cultural Services: Reduced prices in cultural services contributed to the lower inflation rate in this sector with a monthly decrease in prices.
- Package Holidays: Seasonal adjustments and market competition likely resulted in lower prices.
Implications
- Consumer Behaviour: Lower prices could be a sign of pricing incentives gathering pace to attract the little that consumers have leftover for discretionary spends for things like recreation. Some recent newspaper articles have highlighted the value that can be had on holidays just now. For example yesterday, November 19th, the The Independent published – “Air fares and holiday prices plummet as travel firms battle for pre-Christmas customers“
Transport Costs
Our previous analysis anticipated that last month’s pronounced dip in transport costs was likely temporary. Indeed on a monthly basis, prices rose by 0.1% in October 2024 compared with a fall of -0.2% a year ago. Prices fell by -2.0% on an annual basis in October 2024, retreating from the -2.4% drop in September. The upward effects seen mostly coming from second-hand cars and from air fares – will this continue in November considering the article linked above?:
- Air Fares: Contrary to typical trends, air fares rose by 6.3% on the month in October 2024—the highest October increase since 2001—driven largely by European routes. On an annual basis, air fares increased by 6.6%, reversing a 5.0% decline in the year to September.
- Second-Hand Cars: Prices increased by 0.2% in October 2024, compared to a -3.0% decrease last year, indicating a rebound in demand.
Motor Fuels
Despite increases in other transport costs, motor fuel prices thankfully continued to decline:
- Petrol: Fell by 2.8 pence per litre between September and October 2024, standing at 134.0 pence per litre.
- Diesel: Decreased by 2.7 pence per litre, now at 139.1 pence per litre.
Analysis
The stabilization of oil prices and rising costs in air travel and second-hand vehicles suggest that transport costs may contribute to inflation in the coming months, although press reports this week indicate air fares are being seen as good value in November.
Figure 3: Rise in annual transport inflation supported by air fares.
Food Prices: A Modest Increase with Potential Implications
Food and non-alcoholic beverage prices rose by 1.9% in the year to October 2024 (the annual rate was 10.1% in October 2023), slightly up from 1.8% in September. This marks only the second increase since March 2023.
Noteworthy Details
- Vegetables: Prices for vegetables, including potatoes, contributed significantly to the increase, as they rose this year but fell during the same period last year.
- Historical Context: While the current rate is well below the 19.2% peak in March 2023, it’s essential to monitor this sector due to its direct impact on consumers.
Takeaway
For traders, the slight uptick in food prices could signal upcoming inflationary pressures in the food retail sector, affecting investment decisions on agricultural commodities and food-related stocks.
Figure 4: Annual inflation rate for food and non-alcoholic beverages rises for only the second time since March 2023.
Owner Occupiers’ Housing Costs (OOH) Reach Historic Highs
OOH costs, which represent expenses associated with owning, maintaining, and living in one’s home, rose by 7.4% in the 12 months to October 2024, up from 7.2% in the 12 months to September. This is the highest annual rate since February 1992. OOH costs rose by 0.8% on the month.
Understanding OOH
OOH includes costs like mortgage interest payments, property taxes, and maintenance expenses. It accounts for approximately 16% of the CPIH, making it a significant component of inflation.
Why OOH Matters
- Market Indicator: Rising OOH costs reflect increased housing expenses, which can affect consumer spending and saving habits.
- Interest Rates Influence: Persistent increases may prompt the Bank of England to adjust interest rates, influencing borrowing costs.
- Investment Strategies: For real estate investors and financial market participants reading Trader.yt, this trend highlights potential opportunities and risks in the housing market.
Figure 5: Contribution from owner occupiers’ housing costs continued to rise between September and October 2024.
Education Costs Rise
Education costs saw a notable rise, with prices increasing by 5.0% annually, up from 4.4% in September. The monthly rate also increased to 3.2% in October from 2.6% in October 2023.
Implications
- Consumer Spending: Higher education costs can strain household budgets, potentially reducing spending in other areas.
- Policy Considerations: The government may face increased pressure to address rising education expenses.
Health Services
Prices rose by 5.6% annually in October, up from 5.2% in the 12 months to September, indicating an acceleration in price pressures within the sector.
Communication Services
Prices increased by 4.7% annually in October, a slight decrease from the 5.2% rise observed in the 12 months to September, suggesting a modest easing in price pressures.
Core Inflation Remains Stubbornly High
Core CPIH—which excludes volatile items like energy, food, alcohol, and tobacco—rose by 4.1% in the 12 months to October 2024, up from 4.0% in September. This indicates that underlying inflationary pressures persist in the economy.
Figure 6: Annual CPIH services rate was unchanged, but core and goods rates rose in October 2024.
The CPIH services annual rate was unchanged at 5.6%, suggesting that the increase in core inflation is primarily due to goods rather than services.
Market Implications
- Monetary Policy: Persistent core inflation may influence the Bank of England’s decisions on interest rates, affecting currency and bond markets.
- Investment Strategies: Traders reading Trader.yt should consider inflation-hedging strategies and monitor sectors sensitive to interest rate changes.
Conclusion: Inflationary Pressures Resurface, Confirming Our Forecast
The latest data confirms our previous analysis that last month’s dip in inflation was temporary. Energy costs, particularly electricity and gas, have reignited inflationary pressures. Additionally, sectors like housing related costs continue to set new records not seen since the early 1990s.
For traders and investors, this underscores the importance of staying informed about macroeconomic indicators and sector-specific trends. Market strategies should account for potential shifts in monetary policy, persistent inflationary pressures, and their impact on various asset classes.
At Trader.yt, we remain committed to providing in-depth analysis and insights to help you navigate the complexities of the financial markets.
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