Inflation sticky at 4%: Experts react

UK inflation remained flat at 4% in January, with food showing the first monthly fall since 2021 – by Christian Leeming

 
Forecasters had expected a slight rise to 4.2%; the biggest upward factor was rising gas and electricity costs – the biggest downward factor was furniture and food

Chancellor Jeremy Hunt says: “The plan is working, we have made huge progress in bringing inflation down”

But Labour’s Rachel Reeves says prices are still rising, and that “it’s time for a change”

Inflation peaked at 11.1% in October 2022 – the government pledged to halve the rate in 2023; the Bank of England target remains 2%

‘Core inflation’ – which excludes energy and food – was also unchanged, at 5.1%; rents were up 6.2% compared to last year – while house prices across the UK were down 1.4%
 
Here are some thoughts from around the world of personal finance:
 
Mohsin Rashid, CEO of ZIPZERO, said: “2024 has started off in the wrong direction, adding insult to injury for those suffering from the effects of high interest rates. People are holding fast for some good news to take the bad taste out of their mouths, but this latest blow of sticky inflation would test the patience of a saint.”

“A huge number of mortgage customers are holding out for interest rate cuts, but after today’s news, this feels like a distant notion. And while the Government may claim that the cost-of-living crisis is fading away, such a statement is far removed from the reality faced by millions across the UK – make no mistake, eye-watering grocery prices coupled with rising energy and mortgage payments will continue to plague households for months to come.

“As ever, struggling households are being hung out to dry by a government that, come next Thursday, will have completed its final round of cost-of-living support payments and seems to think consumers’ financial problems are solved. In the coming months, shoppers will need to rely on penny-pinching and foregoing luxury in order to minimise the impact of yet another month of rampant inflation.”
 
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Inflation’s not budging, but today’s data does at least defy many experts’ prediction of another rise. Either way, it will all fuel the ongoing discussion around when the Bank of England will start cutting the base rate.

“But there’s still a considerable distance to cover before the Bank’s 2% inflation target is reached. At this time, those in a position to save lump sums should be proactive, capitalising on any potential advantages presented by the heightened base rate. The Bank of England’s next interest rates decision comes on 21 March, and all eyes will be firmly on how the battle against inflation shapes up over the intervening six weeks.”
 
Lily Megson, Policy Director at My Pension Expert said: “Late last year, the Prime Minister celebrated reaching his 5% inflation target. We were told this was a victory, but the reality was that Britons were still grappling with the repercussions of 18 months of soaring inflation. Now, months later, with inflation still at 4%, we can see how premature the government’s back-slapping was – and it’s not good enough.

“The government has struggled to rein in inflation, leaving Britons and their hard-earned savings to bear the brunt. For many, making long-term financial plans has become a minefield, and planning for retirement has become particularly difficult as inflation continues to diminish the real-terms value of people’s pension pots.

“More help is desperately needed. It’s crucial going forward that the government ramps up its support to those struggling with their finances and their financial planning. MPs should be in dialogue with the financial sector to bring policies that ensure Britons have improved accessible routes to financial education and advice, rather than expecting people to navigate the ongoing cost-of-living crisis on their own.”

Ben Laidler, Global Markets Strategist at eToro said: Yesterday’s worse-than-expected US inflation number was a reality check to markets that have rallied hard and fast. Today’s UK inflation report may be a similar downer.

January UK prices are set for a second consecutive acceleration, to an estimated 4.2%. December’s excuse was rising alcohol taxes, this one will be about 6% wage growth and services inflation.

It will leave UK Inflation double the target level, moving in the wrong direction, and some of the highest among developed market peers. This will give the Bank of England plenty of ammunition to delay talk of rate cuts past the current August and three cuts this year consensus.

This has pushed up Gilt yields, and continued to support the pound, making it the second best performer of the year after the dollar. And this would also be a headwind for the exporters that dominate the FTSE 100.

 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “There is a little bit to love for the Bank of England (BoE) in today’s inflation numbers, although it’s no bed of roses for consumers. The Consumer Prices Index (CPI) remains over twice its 2% target coming in at 4.0% in the year to January 2024, the same rate as December. Core CPI, which excludes volatile energy and food prices, also remained steady at 5.1%.

“This is a well-anticipated interruption in the journey towards lower inflation, though. In part, it reflects higher energy costs and airfares, which could well be temporary, as well as the year-on-year number lapping a relatively weak figure in 2023. While it’s not going to be a straight line back to the 2% target, restrictive interest rates are working.

“January’s inflation was also held down by a welcome fall in food prices, the first monthly drop since September 2021, as well as weakness in furniture and household goods, and clothing and footwear, perhaps a result of some heavy post-Christmas discounting. Yet while goods inflation has largely been conquered, services inflation is still on the sticky side, in part driven by buoyant wage rises.

Where does inflation go from here?

“Inflation looks as though it will subside quite quickly over coming months as higher interest rates increasingly weigh on growth and household spending power, and as previous hefty rises fall out of the annual calculation.

“Yet the UK’s rocky relationship with inflation could continue. The helpful base effects from energy and food could subside, and a clutch of household bills are set for significant increases this spring. Wages are also still rising at a decent clip, as indicated by yesterday’s employment data, which could put some upward pressure on demand. The Bank itself predicts that price rises will reaccelerate in the second half of the year, reflecting the persistence of inflationary pressures.

What does it mean for interest rates?

“Interest rate cuts are on their way as the inflation trend is looking favourable. Overall, there is currently insufficient evidence of a concerted economic weakening that might make the Bank think about cutting at the next meeting of the Monetary Policy Committee on 21 March. There will be another batch of inflation and other economic data before then, though, so the picture could change.

“February’s CPI figure is likely to be markedly lower and, if so, could offer the BoE more confidence to start easing. However, this process may not commence until the second half of the year, and we are likely looking at rates north of 4% until 2025, a more difficult time for borrowers but welcome respite for savers who have until recently seen the spending power of their savings dwindle.”