Please see the below article from Evelyn Partners detailing their thoughts on this morning’s UK inflation announcement for December 2023. Received yesterday.
What happened?
UK annual headline CPI inflation for December was reported at 4.0% (consensus: 3.8%), which was marginally higher than November’s reading of 3.9%. In monthly terms, CPI was up 0.4% (consensus: +0.2%), compared to a decrease of 0.2% in November.
Core inflation (excluding food, energy, alcohol, and tobacco) was 5.1% (consensus: 4.9%), which was consistent with the prior reading.
What does it mean?
UK CPI in December came in hotter than expected, marking a blip in inflation’s downward trajectory. The biggest concern right now is the services category, which was up 6.4% vs the expectation of 6.1%. The Bank of England will want to see some deceleration in this category before they can be confident in easing policy.
But looking forward, we expect CPI to continue to decelerate for two main reasons. First, the base effects look favourable in the coming months. Second, energy prices are likely to fall — Cornwall Insights, an energy research firm, forecast that the Ofgem price cap will fall by 14% in April.
The largest upward contribution to the monthly change in the December CPI annual rate came from alcohol and tobacco division, with prices rising by 12.8% in the year to December 2023. This increase was largely due to an increase in tobacco duty, after the government announced higher taxes in their autumn statement.
The largest downward contribution came from food and non-alcoholic beverages. Meanwhile, the gas and electricity category also continued to pull down the headline figure following the October change to the Ofgem energy price cap.
Traders now expect around five interest rates cuts in 2024, with the first coming in May. Although they have rowed back on their expectations at the start of the year when they priced in six cuts for the year.
Sterling rallied on the data release, and we could see some pressure on front-end gilts when the bond market opens this morning.
Bottom Line
This was a disappointing inflation print for the Bank of England, but it likely marks a bump in the road to lower inflation. With energy prices set to continue falling, it’s looking like inflation could be back at the 2% target by the middle of 2024, giving the Bank room to cut interest rates.
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Alex Clare
18/01/2024