Today’s announcement from the ONS that UK CPI has fallen to 3.9% year on year, has managed to surprise markets and analysts to the positive, hitting a two year low. Consensus was that the rate would come in at around 4.3%, falling from 4.6% last month. However, this is extremely positive news on many fronts and is particularly welcome in the run up to Xmas with so many people and businesses feeling the pressure of the cost of living crisis.
So what does this Xmas boost inflation news that the cost of living is rising less slowly (yes, it is still rising of course) mean for advisers and their clients? What does it mean for the outlook for interest rates – will we see cuts sooner than expected? Experts have been sharing their views with us today as follows:
Danni Hewson, head of financial analysis at AJ Bell, comments on the latest UK inflation figures:
“Let’s not be churlish, the latest UK inflation numbers deliver a welcome shot in the arm for the UK economy.
Headline CPI fell to 3.9% in November, less than double the Bank of England’s two percent target, which will give markets faith that interest rates will follow the trajectory they’ve already bought into.
Looking at rate expectation this morning there’s growing confidence cuts to the base rate could begin as early as March and that by this time next year the economic landscape will look very different – more than one in 10 are now betting rates could fall back to below 4% by next December.
With around 1.5 million homeowners whose fixed rate mortgages are up for renewal in 2024, these numbers are likely to further increase competition amongst lenders to offer better and better deals.
Falling prices at the pump and slowing food inflation played a big part in delivering this bigger than expected drop in the headline number, though food inflation still stands at a whopping 9.2% and that means for most Brits their budgets are still feeling significant strain.
It remains vital no one forgets that whilst inflation is falling it doesn’t mean prices are falling, and that not everyone has had an inflation busting wage increase over the past couple of years.
Some families will be dreading this Christmas, feeling guilty about the presents they’ve been able to afford or worried about paying off debts they’ve racked up just to afford the basic festive treats.
But with meaningful moves on core inflation and cooling inflation in the service sector, which had been something central bankers were watching nervously, it does feel like those sticky tendrils are loosening their grip.
However, there’s a long way to go to chip off that last 1.9% and it’s impossible not to think about the potential impact the situation in the Red Sea could have on the cost of goods and energy.
It’s Christmas, and we should take a moment to celebrate how far we’ve come, as long as we don’t forget the miles left to travel.”
Karen Barrett, CEO and Founder of Unbiased.co.uk comments:
“This is positive news for the economy, and a further sign that the Bank of England has finally started to actually deliver on its mandate of getting inflation under control.
We’re still way off the 2% target – and far behind our European and US counterparts – so it will be some time before this translates into interest rate cuts, but today’s data does have immediate implications for UK savers to act on now.
Firstly, now is the time to fix your savings if you haven’t already, as rates have already fallen from the peak of over 6% that they’ve reached in recent months.
You can do this with a long-term fixed-rate account, or by investing, but you should ensure you have a long-term strategy that’s appropriate for your situation.
There are more obvious opportunities around mortgages. As the faster inflation continues to fall, the more quickly mortgage rates will follow suit. If you’re on a variable rate mortgage, you’ll see the benefits immediately.
So if you’re about to apply for a mortgage or lock in a new deal, think carefully about what makes sense to commit to while things are still in flux.
Whatever areas of their finances people are reassessing right now, the vital thing is that they seek advice before they take action.
We’re living in exceptionally complex times, and while you personally can’t control what happens to interest or savings rates, what you can do is speak to an expert, to help you make the right decisions for your future.”
Lily Megson, Policy Director at My Pension Expert, said:
“Inflation continues to head in the right direction as year-end approaches. However, the cost-of-living crisis has plagued budgets throughout 2023 – household finances are unlikely to bounce back immediately.
The same will be the case for pension planners. Particularly in the run up to the new year, many Britons will be reconsidering their retirement finances and trying to plan for the future. A challenge to say the least, given the unpredictability of the UK’s economic performance.
It is therefore vital that the government step up and take the strongest measures to support individuals on their financial journey, particularly by addressing broader cost-of-living challenges. In 2024, the emphasis should be on boosting pension engagement, increasing access to financial advice, and promoting effective financial planning, ensuring all savers can navigate complexities with confidence.”
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “The signs are that the battle against inflation is slowly being won. People will breathe a sigh of relief this Christmas as a result, grateful for a little respite from the cost-of-living crisis. But it is in January – when people’s financial planning tends to come into sharper focus – that we are likely to see the combination of falling inflation and steady interest rates truly take effect.
For much of the past two years, money in savings accounts was losing value in real terms due to increasing inflation. Now, the situation has been reversed, with inflation falling below the base rate, affording those keen to save or invest their money the opportunity to reconfigure their financial strategies.
But timing is everything, with a chance the base rate will fall in 2024. Moreover, seeking out the best returns requires people to carefully consider the products and providers they go with – many banks are still failing customers with paltry returns, so once the Christmas shopping is finished, it’s important people shop around for the best options to make their savings work harder for them.”
Mohsin Rashid, CEO of ZIPZERO, said:
“Today’s figures provide much-welcomed comfort that inflation is headed in the right direction. That does not mean, however, that all is merry. The cost-of-living crisis will still be casting a nasty shadow over people’s Christmases, and undoubtedly stockings will shrink as millions reel from the aftermath of two years of financial hardship, driven by rising interest rates and sky-high inflation.
The one gift Britons still need this Christmas is support. Support from the Government in the form of longer-term financial aid and relief packages in 2024, and support from retailers to keep prices affordable in the New Year.”
Andrew Gething, managing director of MorganAsh, said:
“The significant drop in inflation last month was a result of the lower energy price cap coming out in the wash. While greater than initially predicted, today’s news of a more subtle drop is somewhat akin to the gradual improvements economists expect to see moving forward. Nonetheless, this is more positive news, especially as it is driven by the easing of food costs and petrol prices – two key pressures for the general public.
Of course, the Bank of England will continue to play Scrooge and remind everyone we are not out of the woods just yet, with inflation still high and some way off the illusive 2% target. They may even have one eye on next month’s figures and any potential impact of both Christmas shopping and seasonal spending. As a result, any predictions for an early base rate drop in 2024 may need to be reevaluated – especially as three MPC members voted for a rise just last week.
The 2% target is still likely to be some way off, keeping pressure on the most vulnerable of households. With a worrying number of firms unable to identify how many vulnerable clients they currently have, it comes as no great surprise to see that the FCA is set to review firm’s vulnerability management in January, as part of its ongoing enforcement of Consumer Duty.
The regulation requires all firms to assess clients and ensure they are receiving good outcomes. Building a complete picture of the customer base and identifying those in difficulty just isn’t possible though without the necessary data and a consistent approach to monitoring consumer vulnerability.”
Adam Oldfield, chief revenue officer at Phoebus Software, says:
“The drop in inflation to 3.9% is greater than almost everyone expected. It will be welcome news to many as we head into Christmas and with wages rising at almost double the rate of inflation at 7.3%, many should now start to feel better off than they have done for a considerable time. That said, there appears to be a real divide between those with money and those with less, for whom any inflation causes a very real impact.
Of course, inflation is still almost double the 2% target that the Bank of England is set, so further measures will need to be taken, but it means that while interest rates are unlikely to fall just yet, that decreases may well be on the cards by the second quarter of 2024 if inflation continues on its downward trajectory. The markets already appear to be pricing this into mortgage rates, which have been dropping over the past two months. Good news for the 1.3million people still due to come off their five-year fixed rate mortgage next year.
These will no doubt be very welcome figures for the government as it looks to set a date for the general election next year.”
Commenting on today’s inflation fall to 10.1% in the UK, John Glencross, CEO and Co-Founder of Calculus said:
“Today’s inflation figures mark a significant turning point. Seeing the annual CPI fall to 3.9% is not just a number – it’s a sign of economic resilience. It’s especially heartening to see core inflation down to 5.1%, which suggests a shift to a more stable economic environment. These figures provide reassurance for consumers and businesses alike. For us at Calculus Capital, and the wider venture capital community, these figures mean we can look ahead to 2024 with continued optimism. They reaffirm our commitment to investing in innovative UK businesses, particularly in times like these, when growth is not just a goal, but a necessity for economic recovery.”
Commenting on what today’s inflation data might mean for household finances, Rob Morgan, Chief Investment Analyst at Charles Stanley, said:
“Today’s figures indicate the worst of the cost-of-living squeeze is over. Prices are still rising but wages are now outpacing them, so workers are feeling some real-life benefit. It goes some way to making up for a prior period of pay trailing behind, although the size and length of that inflationary shock means overall incomes are still suffering for many.
Higher interest rates in response to inflation have been welcome news for savers. Previously, rates lagged, and the spending power of cash went backwards, but now there is a much-improved picture. Inflation is forecast to subside further while interest rates are anticipated to remain in the region of 5%, resulting in inflation-beating returns for those securing competitive rates on cash for the time being. For borrowers, recent market moves have ameliorated the cost of new debt and things are looking much better than midway through the year. However, this may be as good as it gets for a while as a trajectory of cuts over 2024 is already priced in.”
In response to the latest drop in inflation, Nathan Emerson CEO Propertymark comments.
“Today’s drop in the rate of inflation is positive news for the housing market and consumers in general. Interest rates were preserved at 5.25 per cent earlier this month, and now that inflation has fallen further, Propertymark are optimistic this may lead to a potential dip in interest rates in early 2024. This will help restore stronger confidence to the housing market and make the prospect of buying and selling a house more attractive to consumers. Propertymark are keen to see further progression in the coming months.”
Kirsty Watson, chief operating officer, at abrdn adviser, said:
“Prices are now rising at their slowest rate in more than two years, and significantly slower than the 10.1% CPI recorded at the start of 2023.
This will be welcomed by clients and advice firms alike – both have had to shoulder increased costs.
As we look ahead to the new year, the big questions will be whether this trend will continue, what factors might spark further price rises and how interest rates are likely to respond to future movements. Clients will value reassurance that their financial plans are prepared to keep delivering good outcomes, whatever conditions transpire, and that their advisers are on hand to help them adapt their strategies quickly if and as required.”
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