Counter to experts’ expectations that the UK would see another fall in the rate of CPI inflation for December, today’s announcement from the Office for National Statistics (ONS) has revealed that UK inflation actually rose in December to 4%, from 3.9% in November.
So, what does this mean? Just as it seemed we were beginning to think that the inflationary beast was being tamed to a degree, these new data have dashed hopes of economic recovery and cuts to base rates. Whilst it seems that the culprits behind today’s shock increase are related to rises in tobacco and alcohol, the prospect is also looming large of supply side problems caused by transport issues through the Red Sea which hasn’t yet taken effect in the data but which we are seeing playing out each day on mainstream news media.
The question on all our minds is what might today’s inflation rise mean for the world of financial advice, for investment decisions and for all those people and businesses who are struggling with the cost of living crisis? Experts from across the sector have been sharing their thoughts with us this morning as follows:
Danni Hewson, head of financial analysis at AJ Bell, comments on the latest inflation data as follows: “It’s a tiny spike but psychologically it’s a mountain. Households had begun to hope the colossal hikes that had taken a salami slicer to their budgets over the past year might finally be in the rear-view mirror.
“People know prices are still rising, you can’t do your weekly shop without accepting that, but the moment at the checkout when the cashier tots up the damage had begun to feel a little less overwhelming.
“Even those who aren’t glued to the news on their phones throughout the day will have gleaned that the situation in the Red Sea is something that might have a tangible impact on everyday life. But that disruption wasn’t captured by these figures, other factors were at play in December. One is a UK quirk – the impact of increased duty on tobacco products created the lion’s share of last month’s hike.
“But it’s the uptick in service inflation which will trouble Bank of England policy makers. That’s the sticky bit that will make the last few percentage points harder to whittle away.
“The UK isn’t alone, other countries including the US have found themselves in the same situation, and it seems the path to that hoped for ‘soft landing’ will have a few detours.
“Whilst markets are still hopeful rate cuts will come thick later this year, the date for that to commence has slipped back.
“Looking forward there are so many variables at play, central bankers are likely to want to keep their powder dry for as long as they can. But walking that tightrope has just got a little bit harder as we wait and see whether the situation in the Middle East escalates or if a quick solution can be found.”
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.
“Inflation numbers from the US, UK and EU should pour some well-deserved cold water at buoyant traders who are pricing rate cuts in the first quarter of 2024 and help bring market inflation expectations back to planet earth.”
Richard Carter, head of fixed interest research at Quilter Cheviot said:
“UK inflation came in at 4.0% in December, joining the US and Europe with a disappointing uptick compared to the 3.9% level seen in November. Though this increase does not take the figure drastically higher, it shows that the UK’s battle against inflation is not yet over and the situation remains precarious. The festive season saw alcohol and tobacco lead the way as drivers of this uptick, while the largest downward contribution came from food and non-alcoholic beverages.
“Though inflation has risen, the latest GDP figure left the UK teetering on the edge of a technical recession and the labour market is showing signs of weakening, so there is no doubt that the Bank of England will continue to face increasing pressure to begin cutting rates. What’s more, the falls in inflation prior to December have also started to take effect on pay, with total pay growth slowing more than expected to 6.5% in November, down from 7.2% in October, which will only exacerbate this further.
“Not only has the headline rate of inflation seen an unwanted uptick, but Core CPI (excluding energy, food, alcohol and tobacco) still remains relatively high. Core inflation has been falling much more gradually than the headline figure and now sits at 5.1%, holding steady at the same rate as November. Progress here is likely to be slow, so the Bank may resist making rate cuts until it returns to a more palatable level.
“Significant global headwinds also remain, not least the events in the Red Sea which could have a considerable impact on consumer prices in the coming weeks. So, whether the Bank buckles under the pressure and begins cutting rates sooner than it might have originally liked remains to be seen.”
Andrew Gething, managing director of MorganAsh said: “Today’s inflation figures are a reminder that firms shouldn’t count their chickens just yet. While there has been much expectation of reaching the 2% target and a potential base-rate drop, the first increase in inflation in almost a year shows we may still be some way off. Markets and economists have been very confident about future cuts, despite ongoing caution from the central bank.
“Positive news on wholesale gas prices, as well as easing food and petrol prices are no doubt encouraging, although a December rise has been driven by pressure on key consumables such as alcohol and tobacco. The Bank of England will of course have one eye on a number of macro challenges, such as escalations off the Yemen coast, with attacks on cargo ships in the Red Sea. Rising inflation in the US and wage growth at home are also key factors moving forward.
“As the financial markets and many firms in general all find more confidence and look ahead to potential cuts, we mustn’t forget the situation we are in now, and the difficulty still facing many of our clients. Pressures on household budgets, particularly for those remortgaging from historically low rates, could push many into a vulnerable position. Given the greater responsibilities given to firms by Consumer Duty, we must also consider much more than just the financial vulnerabilities of our clients to deliver good outcomes.
“It comes as no surprise to see that the FCA continues to prioritise consumer vulnerability in its ongoing work around Consumer Duty – a cornerstone of its regulatory approach. It wants to see firms identifying the proportion of vulnerable people within their customer base – and them demonstrating that they are achieving the best possible outcomes for this cohort. Sadly, the FCA has found many are falling well behind in this – and they lack the suitable data to not only identify their customers, but also to monitor outcomes.”
Danny Vassiliades, Partner at XPS Pensions Group, commented: “This time last year, CPI inflation stood at 10.5% and the Bank of England was in the middle of 14 consecutive interest rate rises in a bid to control it. Whilst CPI remains above the Bank’s 2% target rate, today’s announcement shows what a difference a year can make.
While we are watching the unfolding situation in the Red Sea and considering potential inflationary impacts of this carefully, some forecasts are suggesting that CPI inflation could hit the Bank’s 2% target by mid-2024. In this scenario, many pension increase limits will not apply, to the benefit of pension scheme members.”
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said: “A climb in inflation isn’t the news that many will have been hoping for.
“And while we’re expecting inflation to begin to slow throughout 2024, we’re mindful that there are still volatile and uncertain underlying economic conditions at play. There may be some unexpected bumps in the road – periods where clients will particularly value their advisers’ support, counsel and expertise.
“Perhaps the question on most clients’ lips will be what this means for interest rates, and how soon they’ll start to fall. The Bank of England will announce its decision in just over two weeks’ time – another flashpoint where clients will be looking for even closer support, and where advisers have a real opportunity to once again underline their value.”
Karen Barrett, CEO and Founder of Unbiased, comments:
“After a promising fall to 3.9% in November, it’s disappointing to see today’s inflation data return to an upwards trend. Although this creates yet more economic uncertainty, there are still positive, proactive steps that savers and investors can be taking right now.
“For example, it is advisable for mortgage holders to take action, as the Bank of England (BoE) may increase the base rate soon to tame inflation, in turn pushing up some mortgage rates. You can remortgage six months in advance, and switch to a better deal before your existing offer ends, so it’s worth seeking advice on your individual circumstances.
“Meanwhile, this is an opportunity for savers, as a higher base rate usually translates into more generous savings rates. So although they’ll need to be wary of higher borrowing and living costs, they’ll at least get a better return from the money that they set aside for the future.
“For those feeling unsure on how to handle their finances at this time, the best thing they can do is speak with a financial adviser.
Commenting on today’s inflation figures and how investing in UK business can stimulate the economy, John Glencross, CEO and Co-Founder of Calculus, said: “Following today’s rise in inflation figures, investors, consumers and businesses alike will be turning to the upcoming interest rate decision for signs of more positive news to come as we head into the new year.
“For Calculus and the wider venture capital community, we are investing in innovative UK businesses, which have the potential to grow and help stimulate economic recovery. As Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investors, we understand the long-term nature of investments into private unquoted companies and have the flexibility to ride out these periods.”
