15 January 2025
If you are covering the latest UK inflation figures, please find comments below from Lindsay James, investment strategist at Quilter Investors:
“CPI data for December shows a modest easing in price pressure, with headline inflation falling to 2.5% from 2.6% the previous month. This rounds off a year marked by a resurgence of inflationary forces in its latter stages, prompting the Bank of England to diverge from the ECB and the Federal Reserve by keeping interest rates flat at 4.75% during the December meeting.
“The month-on-month rate accelerated to 0.3% from 0.1% in November, while core inflation, which strips out volatile food and energy prices, ticked down more convincingly to 3.2%, from 3.5% in the prior month.
“The primary drivers of inflation in December were rising costs for transportation, household services, whilst clothing, restaurants and hotels saw a downward contribution.
“Services inflation, which stood at 4.4%, down from 5% in November, remains a major focus as wage inflation stays well above the 2% target. Employers’ responses to the autumn budget suggest that cuts to headcount and price hikes are the most likely outcomes. While these measures may eventually dampen wage inflation, in the near term, public sector pay rises of around 5-6%, combined with ongoing labour shortages in parts of the service economy, continue to drive elevated levels of wage growth. With wages accounting for around 60% of the costs within the service sector, this remains a significant obstacle to further interest rate cuts.
“At its December meeting, the Bank of England also highlighted rising risks from geopolitical tensions and trade policy uncertainty. With energy prices increasing due to further pressure on European gas supplies amidst a cold weather snap and ongoing global trade frictions, it is unsurprising that consumers are raising their inflation expectations in the year ahead. This shift in expectations can alter consumer spending decisions and become a more potent driver of future inflation.
“Markets are now sceptical about the prospect of further rate cuts in the UK before May, pricing in less than two quarter-point cuts for the year as a whole. While this data will show some encouraging signs of progress, much of this is negated once mortgage costs are factored in with CPIH, the CPI index including owner occupiers’ housing costs, remaining unchanged at an annual rate of 3.5%. With government bond yields rising in recent weeks, the upward pressure on mortgages remains in place. Consequently, the UK economy is unlikely to experience interest rate cuts in the near term, adding to the headaches at the Treasury as growth is likely to remain anaemic.
“While the most likely outcome remains weak growth and slowing inflationary pressure as we move through the year, the increasing frailty to the UK economy suggests that the risk of recession, though still modest, appears to be increasing.”
