Hold onto your hats, because those eagerly awaited interest rate cuts just hit a major roadblock! The dream of lower borrowing costs next month has been dashed as December's inflation figures revealed a surprising jump to 3.4%. This marks the first time the headline annual inflation rate, officially known as the Consumer Prices Index (CPI), has climbed since last July.
What does this mean for your wallet and the economy? Well, it almost certainly signals that the Bank of England will keep its benchmark interest rate firmly planted at 3.75% when its Monetary Policy Committee convenes in early February. This decision will likely disappoint many who were hoping for some financial relief.
But here's where it gets a bit more nuanced...
Grant Fitzner, the chief economist at the Office for National Statistics (ONS), explained that the uptick in inflation was partly fueled by an increase in tobacco prices, a direct result of recent excise duty hikes. On top of that, food inflation also nudged upwards, moving from 4.2% to 4.5%. Even airfares played a role, with prices rising more than the previous year, likely due to the holiday travel season. Rising food costs, especially for staples like bread and cereals, also contributed to the upward pressure.
And this is the part most people miss... While those factors pushed inflation higher, there were some counterbalancing forces. We saw a decrease in rent inflation, and prices for various recreational and cultural goods also fell. On the business front, the annual increase in prices for goods leaving factories remained steady, and the cost of raw materials for businesses actually slowed down, thanks in part to lower crude oil prices.
A Controversial Take? While the government is touting measures to ease the cost of living, some might argue that the impact of these measures is being overshadowed by global price pressures and specific domestic factors like tobacco duty. Is the current approach truly addressing the root causes, or just applying temporary fixes?
Chancellor of the Exchequer, Rachel Reeves, emphasized her commitment to lowering the cost of living, highlighting measures like a £150 reduction on energy bills, a freeze on rail fares for the first time in three decades, a second consecutive year of frozen prescription charges, and an increase to the national minimum and living wage. She stated, “Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner.”
Alice Haine, a personal finance analyst at Bestinvest by Evelyn Partner, offered a more optimistic outlook, suggesting that this December uptick is likely to be a temporary blip. She anticipates that the slowdown in price pressures observed in late 2023 will resume this year, influenced by tax rises and spending constraints from the Autumn Budget, a cooling labor market, and moderating wage growth. Encouragingly, she pointed out that underlying inflationary pressures are continuing to ease. Core inflation, which excludes volatile items like food, alcohol, and tobacco, held steady at 3.2%. However, services inflation did edge up slightly to 4.5%, hinting at persistent domestically driven price pressures.
Charlie Ambler, co-chief investment officer at Saltus, echoed the sentiment that this rise might be temporary. He noted that while markets might not react positively, the Bank of England had already signaled a downward inflation trajectory. He believes the key for the Bank of England lies in controlling services inflation and wage growth, rather than getting too caught up in short-term fluctuations in the headline rate. He suggested that December's rate cut indicated growing confidence in cooling underlying pressures, and that fiscal tightening should reinforce this trend over time. Therefore, near-term inflation rises are more likely to be seen as 'noise' rather than a fundamental shift in direction.
What are your thoughts? Do you agree that this inflation jump is just a temporary hurdle, or does it signal a more persistent problem? Let us know in the comments below!
