Cheerful economic news amid Brexit crisis

If you can bear to forget about the historic Brexit talks for a second, there was more cheerful news on the economy.

Surprising everyone the UK inflation rate kept steady at 2.4% in October, confounding expectations of a rise to 2.5%. The Consumer Prices Index (CPI) figure included falls in food and clothing costs which countered rises in utility bills and petrol prices. More importantly, core inflation was also steady at 1.9% in October.

The slowdown in inflation is good for the spending power of the British consumer, many of whom are now experiencing wages rising at the fastest pace since 2008.

It’s been a long time coming but the news on Monday that wages are up by 3.2% over the last three months is an encouraging sign that stagnant incomes are finally a thing of the past.

If inflation has peaked, what then for interest rates? Well, some analysts suggest that if the decline in inflation continues then the Bank of England may have to hold off raising rates in the short-term.

Inflation has been falling since November last year, when it peaked at a five-year high of 3.1%, mainly because of the inflationary effect of sterling’s decline after the June 2016 Brexit vote.

The Bank had made it plain that it will continue raising rates to keep inflation to the target 2% but the pressure may now be off. In the City, the betting is now that there will not be a rate rise until next May as there are few signs that prices are rising to make up for higher wages. As anyone shopping at Aldi or Tesco can see, most basic foodstuffs are the most competitive they have ever been.

But ahead of the hoped for deal, sterling made strong gains against the euro and dollar in the hope that Theresa May will get her preliminary EU proposal through Cabinet. Anyway, that’s what traders hoped for and sterling hit a 6-1/2 month peak versus the euro, reversing much of its loss on Monday against the dollar. Against the pound, the euro slipped by 0.48 percent to 86.885 pence.

Yet Brexit remains pivotal. Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “Brexit is still the elephant in the room when it comes to the future path of inflation, and consequently of monetary policy. That’s because the pound now waxes and wanes with the Brexit negotiations, and that has a big impact on how much UK consumers pay for imported goods.”

And what happens next to sterling, with or without a Cabinet approved deal? Ian Strafford Taylor, CEO of travel currency expert FairFX, reckons the pound’s turbulence is not over yet.” He adds: “The draft agreement is the closest we’ve come to having a divorce plan for leaving the EU so far and the outcome of today’s cabinet meeting could give us a much clearer signpost for what leaving the EU will look like.” We can live in hope.