UK Inflation falls to 0.9% surprising economists

November 23, 2016

UK inflation and unemployment data for October were released last week. The figures showed a surprise fall in the rate of inflation to 0.9% from 1% in September. This was below 1.1% expected by economists. The cost of clothing and tuition fees rose more slowly than in 2015, dragging on the headline figure. Furthermore, the impact from the falling pound has not come through significantly into retail prices. However, factory gate prices rose faster than anticipated at a rate of 2.1%, indicating that higher inflation in the future is more likely.


UK unemployment fell by 37,000 to 1.6 million, hitting an 11-year low. As a result, the unemployment rate fell to 4.8% over the period. While this data shows that the UK has so far been resilient to the effect of the EU referendum, job creation is slowing. Anecdotal evidence suggests that the vote is beginning to dampen companies’ recruitment intentions and potentially slowing wage growth going forward. There are growing concerns that lower wage growth combined with higher inflation will erode real earnings.


German GDP data for the third quarter showed that Europe’s largest economy grew by 0.2%, half the rate seen in the in the previous three months. Slowing exports impacted the headline figure. However, there was a positive impact from domestic demand from both household and government spending. While the slowing headline rate is less favourable, stronger domestic demand and weakening exports may go some way to rebalancing the German economy, which has traditionally been very export driven.


Since the election of Donald Trump, bond markets worldwide have seen a sharp selloff, causing yields to rise. This has reinvigorated a gilt market selloff started by fears of inflation in the UK.  As a result, the 10-year gilt yield is now higher that it was before the EU referendum vote, at 1.4%. There is strong negative momentum in the bond market, although it is difficult to anticipate how high yields will go with quantitative easing expansion still ongoing in the UK, Europe and Japan.


Index Open Close Change % Change
FTSE 100 6730 6775 45 0.67%
S&P 500 2164 2181 17 0.79%
Dax 10667 10664 -3 -0.03%
Cac 40 4489 4504 15 0.33%
Nikkei 225 17374 17967 593 3.41%
UK 10 Year Gilt Yield 1.444 1.442 -0.002 -0.14%


Japanese inflation data will be released on Thursday.