19 February 2025
If you are covering the latest UK inflation update, please see comments below from Richard Carter, head of fixed interest research at Quilter Cheviot:
“Inflation is on the rise once again in the UK, with the headline CPI figure coming in at 3.0% in January, following what had been a slight downturn to 2.5% in December. Some of this uptick is owed to VAT being added to private school fees, which came into effect on 1 January and saw prices increase by 12.7%. Steep increases in transport costs, particularly in air fares, and food were also major factors behind the rise. More concerningly core inflation, which doesn't include the more volatile food or energy prices, ticked up to 3.7%, from 3.2% in the prior month.
“The Bank of England opted to cut its base rate by a further 0.25% earlier this month in an effort to boost what had been a flatlining economy. Data out since then showed monthly real GDP grew 0.4% in December, which was considerably better than had been anticipated, but on a quarterly basis this amounted to only a minimal 0.1% lift.
“While the surprise uptick in December will have been welcomed, the outlook is still concerning and forecasts for the year ahead have been slashed. Growth will remain at the top of the Bank’s agenda, and it will no doubt be hoping that its latest rate cut will start to stimulate the economy. However, it will take some time to feed through so we can expect a relatively sluggish start to the year in the meantime.
“At its latest monetary policy meeting, the Bank also provided an updated prediction on inflation, suggesting it will peak at 3.7% in Q3 this year. Given its previous forecasts, this was a rather shocking uplift. The BoE seemingly wants to look through the expected upcoming spike in inflation and instead focus on cutting rates to boost growth, but this can only go so far.
“Labour market figures out yesterday are indicative of continued wage growth pressures, with total pay, including bonuses, accelerating to 6% in the final quarter of 2024. Such strong pay growth could further confuse matters for the BoE, as it will need to balance concerns over a struggling economy with the risk that the continued rise in earnings could slow disinflation.
“Should the spike in inflation peak at a level above expectations, or if the increase is too prolonged, then the Bank could find itself with a nasty headache. ‘Stagflation’ is a word that will have haunted the BoE in recent years, and we could see a resurgence in the coming months should the UK economy not respond as hoped.”
