UK inflation may be past its peak after December readings showed that the consumer prices index (CPI) dropped for the second month in a row.
The 10.5% figure was lower than expected, down 0.2 percentage points on the 10.7% number in November and 0.6 percentage points on the October peak, according to data from the Office for National Statistics.
Lower energy and fuel costs were offset by rising food prices, with more expensive items in supermarkets, restaurants and hotels keeping CPI elevated.
Source: Office for National Statistics
Marcus Brookes, chief investment officer at Quilter Investors, said that the “inflation conundrum” has moderated, but warned that it is unlikely to drop out of the system quickly, with wages on the rise.
“Combining those cost pressures with the effect that energy prices have had and you have a cocktail for sticky inflation that refuses to budge quickly,” he said.
Nicholas Hyett, investment analyst at Wealth Club, said that there will be no respite for consumers, with the cost-of-living crisis set to continue.
“Inflation may be better than we've seen recently, but is still eye-watering by most standards. A winter of strikes ahead may yet mean 'stickier' wage-driven inflation gathers pace too,” he claimed.
The figures could hearten the Bank of England, which has been under pressure to raise interest rates despite weak economic growth in an attempt to stem rising prices.
Brookes said: “As we seem to be at a crossroads with inflation, the future rhetoric coming out of the Bank is going to be crucial for markets and investors.”
So far the Bank has hiked nine times since December 2021, up from 0.1% to 3.5%, but Hyett said that the latest figures could see it slowing the pace of increases.
“If inflation is trending down naturally then interest rates may not need to go so high, which will at least keep debt more digestible for consumers, companies and countries around the world,” he added.
Chris Beauchamp, chief market analyst at IG Group, echoed this point, noting that a second monthly slowing of inflation pressures seems to point to the Bank bringing its hiking programme to a halt in the months to come.
He expected it to cut back increases to 50bps in February and then 25bps in March, before stopping.
Not everyone agreed, however. Hugh Gimber, global market strategist at JP Morgan Asset Management, said that, when taken in combination with yesterday’s labour market report, today’s inflation print will add to the pressure on UK policymakers.
He pointed to higher wage growth – running above 6% year-on-year – as a hindrance to the Bank’s 2% inflation target, while there is “little hope” of a near-term injection of new workers. As such, the only way to bring this figure down is a weaker economy that leads to lower demand.
“Markets are currently split on whether the Bank’s next rate hike will be 25 or 50 basis points. This week’s evidence would suggest that bold action is required,” he said.
“We expect that interest rates will need to rise by at least 1 percentage point over the coming months – taking interest rates to 4.5% or above – before the Bank is able to consider pausing its tightening cycle.”
Sjaene Higgins, mortgage operations manager at the Wesleyan Group, agreed, stating that it was “almost inevitable” that the rate would rise throughout 2023, settling at around 4.75%.
“We’re unlikely to return to the historically low rates we’ve seen in last 10 to 15 years, and the new normal will be rates of around 3% to 4%,” she said.