UK CPI inflation drops slightly to 10.5% in December  – experts react

by | Jan 18, 2023

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This morning, the Office for National Statistics (ONS) has reported the latest UK CPI data for the month of December which showed a year-on-year increase of 10.5%. However, with inflation still close to its 40 year high, the cost of living crisis is continuing to impact consumers’ and business’ budgets in a very negative and destructive way.

But what are investment and finance experts saying about today’s news and the possible impacts on the economy and clients’ finances?

Daniel Casali, Chief Investment Strategist at wealth management firm Evelyn Partners, said that today’s reading will encourage the belief that UK inflation has peaked:

‘Another slowing in annual inflation – the second since October’s peak of 11.1% – will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data. But these are fairly marginal decelerations in prices, inflation remains elevated and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households. The Bank of England will welcome softening inflation but for its rate-setters the receding of price pressures has some way to go before they take the foot off the rates pedal, and particularly if growth continues to surprise on the upside and if growing wage demands prove successful.

 
 

‘Inflation is being led down by energy prices, as wholesale gas prices soften and benefit from less drastic annual comparisons. Energy prices started to surge in late summer 2021, well before Russia’s invasion of Ukraine, so wholesale gas prices had already risen above-trend in December 2021.

‘High frequency data show the energy effect has further to go: wholesale one-month ahead natural gas prices have now fallen to below the pre-Russian invasion of Ukraine level and are down 10% so far in January. Petrol prices are also declining, with the latest price of unleaded petrol on 9 January at £1.50, down from £1.52 at the end of 2022 and a peak of £1.92 last summer. Expect lower energy prices to exert downward pressure on inflation, at least in next month or two.

‘Looking beyond the near term, slowing economic growth, along with higher taxes, rising mortgage rates and less government support on energy prices next year is likely to be a drag on real household take-home pay in 2023. Lower discretionary incomes should prove to be a significant headwind against another upward acceleration in inflation from here. Moreover, high base effects from sharp price increases in 2022 will make it difficult to sustain high annual CPI inflation rates in 2023. Finally, the impact of supply chain disruption on prices in the goods market should begin to fade, while recent sterling appreciation will reduce the cost of imported goods.

 

‘The BoE expects headline CPI inflation essentially to halve to around 5% by the fourth quarter of 2023. Even so, core CPI inflation (excluding food, energy, alcohol and tobacco) could remain fairly sticky. The risk to the BoE’s inflation outlook is the potential secondary impact of workers demanding higher wages to keep up with the high cost of living. With the unemployment rate still near cyclical lows, there is a possibility that higher wage rates become entrenched in the economy, increasing the risk of a wage-inflation upward spiral.

We expectt he Bank’s monetary policy committee to raise interest rates again at its next meeting which concludes on 2 February – most probably by 50 basis points to 4.0%.’

Sjaene Higgins, Mortgage Operations Manager at the Wesleyan Group, the specialist financial services mutual, said: “In little more than a year, we’ve already seen nine hikes to the interest rate, from 0.1% to 3.5%. And it’s almost inevitable that the rate will keep going up during 2023, potentially to around 4.75% by the middle of the year, with little prospect of it falling back until 2024.

 

“Indeed, 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%.

“That’s going to put a further squeeze on mortgage holders, at a time when 1.4 million fixed rate deals are coming to an end. So, it’s no surprise that the ONS is reporting that 45% of UK households are worried about interest rates. Those considering fixing their mortgages should seek advice first. “

Sandra Holdsworth, Head of Rates at Aegon Asset Management comments:

 

UK inflation fell again today but remains painfully high at an annual rate of 10.5%. The core rate of inflation also remained high at 6.3% with Core Service inflation rising to 6.8% over the year.

This data will not change the Bank of England’s policy of raising interest rates so we can expect a further increase of 0.5% in February when they next meet.”

Mike Coop, UK Chief Investment Officer at Morningstar Investment Management shares his thoughts on how raised inflation levels are set to impact investors in 2023:

 

“While the rate of UK inflation fell from a 41 year high in November, and saw a continued decrease in December 2022, down 0.2%, it still has a long way to come down before it is in line with the Bank of England’s target, a place where the central bank could consider intervening to ease the UK’s cost-of-living crisis. The pound has recovered from its Truss-induced lows and while investors would be forgiven for thinking that the tide is turning, the outlook for the next 12 months remains unclear. Recession is looming, interest rates are high and the ongoing tug-of-war between the government and the central bank will continue to dominate headlines throughout the year – with households feeling the brunt.”

Commenting on the figures, Andrew Aldridge, Partner at Deepbridge Capital, said: ““Having slowed to its lowest level in more than a year in November, we’re seeing a gradual slowdown in rising inflation with today’s figure for December. Nevertheless, this is a tough period for public markets. Investors and advisers will be looking to eke out opportunities for clients and we expect that private equity and venture capital shine through as promising opportunities for longer-term growth, with the Enterprise Investment Scheme offering unrivalled tax incentives for encouraging VC activity.”

Samuel Fuller, Director of Financial Markets Online, is looking to the future as he comments:

 

“Though partly driven by energy prices, it will still be disappointing to many not to see inflation falling faster as it may be a sign of things to come. 

“The surging cost of energy fuelled inflation but also hopes it would subside more quickly when global energy costs cooled. No sooner has that started to happen, the Chinese government has signalled it is ready to open the floodgates and unleash a colossal amount of domestic demand. This threatens to create a whole new shock of its own, in which prices rise in the face of an influx in demand.

“There’s now a yawning 4 percentage point gap between UK and US inflation, something policymakers would like to see disappear given falling inflation and lower peak interest rates are needed to provide the softest landing this year. The sudden unlocking of China could hit the prospects of this happening quickly pretty hard.”

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