The Two Charts Confirming Rapid UK Disinflation that Sets the Bank of England Up For 5 Rate Cuts in 2024

UK headline CPI inflation might be running at double the Bank of England's 2.0% target, but if we look closer at the data we see a strong disinflation is underway in the UK, opening the door to interest rate cuts.

The ONS reported headline inflation at 4.0% year-on-year, accompanied by a -0.6% month-on-month reading. Core inflation remains hot at 5.1% y/y, but if we look at recent months, even here, we see a trend of rapid disinflation.

In the below charts, Berenberg Bank analysts compare year-on-year and six-month annualised calculations of headline and core inflation.

The charts show that while the y/y change remains well above the Bank of England's 2% target for both aggregates, the picture is completely different on a six-month basis.

With almost no change in the overall price level between August and January, six-month annualised inflation has hovered around 1% in the previous three prints.

Kallum Pickering, an economist at Berenberg Bank, explains that due to the rapid acceleration in price growth through 2022 and H1 2023, y/y inflation rates still remain inflated by base effects, "and hence give a distorted picture of the recent trend in prices".

He says short of another major supply shock to prices, y/y rates of headline and core inflation look set to fall rapidly further over coming months as base effects fully wash out.

"We expect headline y/y inflation to fall to 2% in spring and to slightly below 2% through Q3. Today’s inflation print keeps the BoE on track for five cuts in 2024 starting in June," says Pickering.