The UK’s inflation rate is set to rise for the second consecutive month, in a blow to hopes that the Bank of England will cut interest rates next month.
According to Refinitiv data, economists predict that the UK’s headline rate of inflation is set to rise again to 4.2% in January when the ONS reveals the official figures next week. However, there is a wide range of opinion among the economists surveyed, with the highest predicted rate being 4.5% and the lowest 3.7%.
Energy prices are a major reason for the rise, as a new, higher, energy price cap came in on 1 January. The price of energy in January was still lower than it was a year earlier, but by a smaller margin than in previous months, which means it’s no longer dragging down the year-on-year inflation figures as significantly.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “After a dismal December, when the price spiral unhelpfully inched back up to 4%, there are hopes that inflation will jump down in January. Unfortunately, that dream is likely to be wishful thinking.
“A rise in the energy price cap is set to be a thorn in the side of companies and consumers hoping this era of higher borrowing costs may come to an end sooner rather than later. The figures will also reflect the fact that falls in some corners of the shopping basket a year earlier will be compared to rises now.
“On the plus side, stripping out these base effects, disinflationary forces are at work, which should limit any nudge upwards. People hunkered down at home in January, avoiding harsh storms, and pulled their purse strings tighter, so discounting “
Threadneedle Street usually pays closer attention to core inflation figures, which strip out food and energy price changes to give a more reliable picture of the longer-term trend on price rises. This rate is expected to tick down, but only barely to 5.0%, having been at 5.1% in each of the last two months.
As long as core inflation remains significantly above 2%, the Bank of England’s Monetary Policy Committee members have said, interest rates are going to remain high enough to be “restrictive”.
The Bank, when it held interest rates at 5.25% last week, said it expects headline inflation to get all the way down to the 2% target in a matter of months. While much of that expected fall is likely to be in the spring due to changes in energy prices, a rise in January will make the path back to 2% harder. It also warned that the headline rate would soon rise again.
A rise in inflation would likely all-but secure another interest rate hold from the Bank of England, its fifth on the trot.
Financial markets price in another hold in March as overwhelmingly likely, with only about a 6% chance of a cut. Markets suggest that the first cut is unlikely to come before June.
Yesterday, the Bank’s biggest hawk Catherine L Mann, who voted to raise rates at last week’s meeting, said it is “prudent” to think that there might be a larger risk of energy prices rising than falling, which could help to keep inflation higher.
The inflation figures will be published on 14 February, just one day before GDP figures reveal whether the UK ended 2023 in a recession.
