‘The battle is far from over’ – Experts respond to surprise uptick in inflation

Inflation, which measures how prices rise over time, rose marginally to 4% in December, up from 3.9% in November; economists had forecast a slight fall, but rises in tobacco and alcohol prices were behind the surprise rise – by Christian Leeming

 
Spikes in the cost of energy and food costs, started by Covid lockdowns ending across the world and fuelled further by Russia’s invasion of Ukraine, have put household finances under pressure in recent times, but with energy bills predicted to come down in 2024, expectations of rate cuts later this year remain.

The Bank’s rate is currently at a 15-year high at 5.25%, leading to higher mortgage rates due to the cost of borrowing money being more expensive, athough savings rates have also gone up.

Since peaking at 11.1% in October 2022 – the highest rate in 40 years – inflation has also fallen quicker than the Bank had predicted, but it still remains nearly double its 2% target.

Ruth Gregory, deputy chief UK economist at Capital Economics, said she expected inflation to fall below the Bank’s 2% target in April, which would leave policymakers “in a position to cut interest rates by June”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, agreed that energy prices falling further would drive down overall inflation, which he said should give the Bank “confidence” to cut its rate for the first time in May, “or failing that in June.

However, with conflict in the Red Sea raising the risk of supply shortages feeding into higher prices, there could be some choppy waters left to navigate.

Here are some comments from around the world of personal finance:

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “This is a timely reminder that there’s work to be done to eradicate the threat of sticky inflation. That said, the current rate of inflation, when viewed alongside an average weekly wage growth of 6.6% and a base rate of 5.25%, there are reasons for consumers to feel more optimistic when surveying the economic landscape. Many more consumers will find themselves in a position to consider savings and investments once again, and those who are are now able to assess the best inflation-beating options out there.

“January is an opportune time to be weighing up these options. Predictions are that the Bank of England will start to cut the base rate later this year, meaning the current rates available on fixed-term savings products will not hang around for long. Consumers must seize this moment to search for the best savings products and providers, taking a proactive approach in finding those which best suit the financial goals for the year ahead.”

 
Lily Megson, Policy Director at My Pension Expert, said: “Evidently, the battle against inflation is far from over.

“This surprise rise has dealt yet another blow to many consumers who are trying to rebuild their savings after they’ve been throughout the past two years. The question, crucially, is how can Britons restore their financial confidence and get to grips with this ever-moving economic climate?

“Everyone deserves – and, frankly, needs – to understand how to manage their finances effectively. But it’s an area where consumers have historically been let down in this country. It is so, so important that government does more to engage with the financial services sector to develop policy that ensures Britons have accessible routes to financial education and advice, meaning they are better equipped and empowered to achieve their financial goals.”

 
Mohsin Rashid, CEO of ZIPZERO, said: “What a blow for Britons. Just as financial recovery had begun to feel possible, hope has once again been ripped away as inflation remains eye-wateringly high – at almost double the Bank of England’s target.

“The inflationary pillage of our pockets is set to continue, at least for the first half of 2024 – so expect tight budgets and financial sacrifice to remain the default for millions across the country. Until inflation is properly squashed back down to manageable levels, it lies with the government and retailers to step up their support for consumers, through targeted relief and competitive pricing respectively.”
 

Jatin Ondhia, CEO of Shojin, said: “This is not the news that people wanted to see at the start of a new year. But investors shouldn’t let this shock increase derail their plans. It was just 0.1% and, given interest rates remain elevated, there are new opportunities.

“The question is whether this is a blip or it signifies more inflation troubles in 2024. If indeed inflation does start to steadily fall again, the base rate is also expected to be cut later this year. So, people will need to consider how they respond to these shifts, as well as broader considerations, such as ‘What happens if the UK economy enters a recession?’ and ‘What might the upcoming general election mean for my investments?’. To that end, given this lingering economic and political uncertainty, we should still expect diversification to remain a prominent trend this year.

“A balance of savings products and lower-risk investments will, for many investors, be balanced alongside some higher-risk investments, providing the opportunity for greater growth in the medium- to long-term. However people choose to manage their finances in 2024, it will be fascinating to see the trends that take shape, given that the investment landscape has evolved markedly when compared to a year ago.”
 

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Consumer Prices Index (CPI) unexpectedly rose by 4.0% in the year to December 2023, higher than an anticipated 3.8% and a little ahead of the 3.9% recorded in November.

Receding transportation costs, thanks to falling pump prices than a year ago, lower household energy bills and flattening food costs have served to dampen inflation markedly over the past few months, but today’s blip upwards will mean a pause for thought for the Bank of England (BoE), which is tasked with getting it back down towards its 2% target.

While goods prices had already largely normalised over 2023, lingering inflationary pressures lurk elsewhere. Notably, services inflation remains sticky at 6.4%, though it does stands to be suppressed by a flagging jobs market with wage rises weakening and vacancies on a decreasing trend. Core CPI, which excludes volatile energy and food prices, remained steady at 5.1%.

As higher interest rates increasingly weigh on economic growth and wages continue to moderate, inflation should resume its downward path over the coming months. December’s reading was slightly skewed by some temporary factors including a tobacco duty rise and a sharp increase in air fares. However, other influences could be less favourable going forward. The helpful base effects from energy and food are set to subside and a recent easing in borrowing costs could add demand back in, which could mean price pressures linger.
 
What does it mean for interest rates?
 

Central banks are attempting to stuff the inflation genie back into the bottle through higher interest rates. Following a period of restrictive rates 2024 is the year of the ‘pivot’ when they can turn their attention to when to cut rather than worrying whether they might raise them further.

This is easier said than done as monetary policy acts with a long and variable lag, which presents a double-edged risk for the BoE: Slash rates too soon and inflation might creep back; cut too late and there may be more economic damage than necessary. Like landing a plane in a storm the BoE will aspire to get the trajectory just right.

From the economy there’s some landing lights shining pretty clearly with weaker signals coming through. The UK teeters on the edge of recession and the heat is coming out of wage rises. However, as today’s data illustrates, inflation’s downward trajectory cannot be taken for granted and consequently the market may have jumped the gun around the timing of rate cuts.

There is a risk the easy wins on inflation are behind us, which means the BoE will still lean towards keeping rates in restrictive territory for the first half of the year as it awaits more concrete evidence that consumption is easing, and inflation is set to return to target. Just as squeezing the last bits of toothpaste out of the tube is more difficult, wringing the remnants of unwanted inflation out of the system can be troublesome.
 
What does it mean for household finances?
 

Today’s figures suggest the cost-of-living squeeze is receding but not over. Prices are rising at a lower rate, and average wages are keeping up, so some workers are starting to see some real-world benefit. It goes some way to making up for a prior period of pay trailing behind, although the size and length of that inflationary shock, alongside the deleterious effect of frozen tax bands, means overall incomes are still suffering for many.

Higher interest rates in response to inflation have been welcome news for savers. Previously, rates lagged, and the spending power of cash went backwards, but now there is a window of reprieve. Inflation is forecast to subside further while interest rates are anticipated to remain elevated to ensure it does, resulting in inflation-beating returns for those securing competitive rates on cash for the time being.

For borrowers, recent market moves have ameliorated the cost of new debt and things are looking much better than six months ago. However, this may be as good as it gets for a while with a fairly aggressive trajectory of cuts over 2024 already priced in by markets.”
 
Ben Laidler, Global Markets Strategist at eToro said:

Today’s surprise inflation rise is a temporary reality check to hopes of Bank of England interest rate cuts starting as soon as May.

Reversing the 10-month downtrend, the increase was in part driven by rises in tobacco taxes, recreation and clothing, offseting petrol prices falling under £1.40/litre for the first time since October 2021 and plunging natural gas prices, which open up room for a lower energy price cap in April.

This is likely just a bump in the road, with falling inflation still in the pipeline, but will rein in the most aggressive hopes for an early May start of interest rate cuts, and give some support to Sterling.
 
George Lagarias, Chief Economist at Mazars comments: “It should be no surprise that British inflation rose in December. Similar data from the US and the EU as well as other forward-looking reports have suggested that prices were ripe for a rebound.

“Price rises are a symptom of persistent geopolitical instability and competition, a theme that will likely stay with us for most of the year. Having said that, we don’t have enough data yet which would suggest a major third inflation wave. We believe that we are now finished with the linear drop in inflation and entering a phase of more volatile price movements.