Please see below article received from Evelyn Partners earlier this morning, which provides details on today’s UK December CPI inflation announcement.
What happened?
UK December annual headline CPI inflation was reported at 10.5% (consensus: 10.5%), down from 10.7% in November and a peak of 11.1% in October. The CPI monthly increase was 0.4% (consensus: 0.3%), compared to 0.4% in November.
What does it mean?
There is increasing evidence that UK headline CPI inflation has peaked and is being led down by lower energy prices. High frequency data show that this has further to go. Take wholesale one-month ahead natural gas prices. They have now fallen to below the pre-Russian invasion of Ukraine level and are down 19% so far in January. This should reduce the upward pressure in household energy bills. Petrol prices are also declining. The latest price of unleaded petrol on 17 January was £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 and rising mortgage rates, are 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 lower the cost of imported goods.
The Bank of England (BOE) expects headline CPI inflation to essentially halve to around 5% by the fourth quarter of 2023. Even so, core CPI inflation (excluding food, energy, alcohol and tobacco) remains fairly sticky. The risk to 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.
Bottom Line
Given the current high rate of consumer price rises, the Bank of England will likely raise interest rates again at its next Monetary Policy Committee meeting on 2 February.
For investors, elevated inflation and likely negative GDP growth in 2023 are clear risks. However, the UK economy is not the equity market, and this probably explains why UK stocks gained nearly 17% more than the rest of the world in 2022, its biggest beat since 1990.
Moreover, UK-listed multinationals are largely linked to what goes on in the rest of the world. Looking forward, the reopening of the Chinese economy from Covid zero policy is a shot in the arm for externally focused UK companies. China seems to be willing to go for growth by relaxing restrictive policies applied to its all-important property sector. According to a Bloomberg report in early January, the Chinese authorities are set to raise lending caps for developers and extend the deadline for firms to meet debt limits. This could be a green light from the Chinese leadership to go for growth and should support overall UK EPS growth. Analysts are already starting to revise up 2024 UK EPS growth expectations in anticipation of global economic recovery. Given low valuations, UK stocks can perform this year.
Please check in again with us soon for further relevant content and market news.
Chloe
18/01/2023