UK Inflation Preview: What to Expect on Wednesday

Will
There
be
an
Uptick
in
UK
Inflation?

The
UK
is
not
expected
to
escape
this
trend,
and
we
are
due
to
find
out
this
week
whether
CPI
has
ticked
up
again
after
a
big
drop
in
the
last
few
months
of
the
year. 

CPI
hit
11.1%
in
October
2022
and
has fallen
back
to
3.9%
in
November
2023.
We’ll
set
aside
politicians
claims
to
have
“halved”
inflation
by
the
end
of
the
2023
and
take
guidance
from
the
Bank
of
England
(BoE),

which
in
its
latest
meeting
in
December
remained
cautious.

The
bare
numbers
have
been
encouraging
for
UK
households,
which
have
been
squeezed
by
the
cost-of-living
crisis
and
soaring
mortgage
rates. Our
chart
shows
the
dramatic
rise
and
fall
of
CPI
and
rates
in
the
last
two
years
or
so.
(UK
interest
rates
were
0.10%
in
December
2021
and
are
now
5.25%,
a
seismic
shift
that
has
taken
many
by
surprise.)

Markets
are
forecasting
a
3.8%
rise
in
inflation
in
December,
still
almost
double
the
official
inflation
target.
Officially,
the
BoE
and
the
Office
for
the
Budget
Responsibility
(OBR)
now
expect
CPI
to
hit
its
official
target
of
2%
in
2025.

As
such
a
surprise
uptick
in
inflation
in
the
coming
months
can’t
be
ruled
out,
and
that
will
justify
ongoing
caution
from
rate
setters
keen
to
see
inflation
vanquished
for
good
before
cutting.
Indeed,
economic
theory
suggests
inflation
is
hard
to
banish
once
it
becomes
“embedded”
in
the
system
–
which
was
the
original
argument
against
quantitative
easing
after
the
financial
crisis.

Governor
Andrew
Bailey
told
MPs
in
November
not
to
focus
too
much
on
the
CPI
number
and
its
apparent
slide.
“I
really
think
the
market
is
putting
too
much
weight
on
the
current
data
releases
and
the
fact
that
we’ve
seen
inflation
come
down
quite
rapidly
–
that’s
good
news
obviously,”
he
said.

“We
are
concerned
about
the
potential
persistence
of
inflation
as
we
go
through
the
remainder
of
the
journey
down
to
2%,
and
I
think
the
market
is
underestimating
that.”

No
‘Mission
Accomplished’
Rhetoric
Just
Yet

The
BoE
also
looks
at
factors
such
as
employment
and
wage
data
before
deciding
rates.

It
can
be
argued
falling
inflation
is
already
in
motion
as
UK
mortgage
rates
have
begun
to
be
cut
in
anticipation
of
rate
cuts
this
year.
Petrol
prices
were
falling
before
the
Red
Sea
attacks,
while
there
are

tentative
signs
that
food
inflation
is
starting
to
ease.
On
the
negative
side,
however,
energy
prices
are
expected
to
nudge
up
again
as
the
Ofgem
price
cap
lifts
this
month;
and
a
cold
spell
in
the
UK
in
January
has
pushed
gas
prices
up
again.

So
don’t
expect
any
“mission
accomplished”
rhethoric
from
the
BoE
next
month.
On
February
1
we
get
the
Bank’s
latest
monetary
policy
report
and
more
forecasts
for
inflation
in
2024
and
beyond,
plus
the
inevitable
questions
about
the
timing
of
rate
cuts.

In
December
it
said:
“monetary
policy
will
need
to
be
sufficiently
restrictive
for
sufficiently
long to
return
inflation
to
the
2%
target
sustainably
in
the
medium
term.”

As
part
of
our
2024
outlook
week

we
collected
investment
banks’
forecasts
for
UK
rate
cuts;
no
doubt
these
will
seem
out-of-date
very
quickly
as
the
year
progresses.
Goldman
Sachs
were
the
most
doveish,
expecting
the
first
rate
cuts
in
February
or
March.

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