Inflation set to rise again in January but experts say increase is just ‘a bump in the road’
Inflation is set to pick up again slightly in January when new figures are released on Wednesday, as the Bank of England considers when it might start cutting interest rates.
Both City experts and the Bank of England think that headline inflation will rise to around 4.1 per cent, having already posted a surprise rise to four per cent in December.
The headline rate will be dragged higher by higher energy prices, which reflect an increase in Ofgem’s energy price cap in January. This will more than offset further falls in petrol prices.
Services inflation, which the Bank of England has identified as a key indicator of domestic inflationary persistence, will also rise relatively strongly from its current level of 6.4 per cent.
Analysts at Deutsche Bank think services inflation will pick up to 6.6 per cent while Pantheon Macroeconomics forecast a jump to 6.9 per cent.
The increase in services inflation will largely reflect so-called base effects, which reflect the impact of price changes the year before on the annual comparison. As a result, experts are not too concerned about the likely increase.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that services inflation would have “resumed its descent” when February’s data is published.
Philip Shaw, chief economist at Investec, noted that changes to inflation “rarely come in straight lines.”
“We would characterise this and December’s reading as bumps in the road. We remain of the view that CPI inflation will fall to the two per cent target and probably a little below around mid-year,” he continued.
Inflation fell fairly rapidly in the final quarter of last year, ending 2023 at four per cent. This was comfortably below the Bank’s own forecasts from November.
The sharp fall has prompted policymakers to signal that rate cuts might be in the offing later this year. Huw Pill, the Bank’s chief economist, confirmed that cuts were a “when rather than an if.”
However, policymakers have pushed back against any imminent easing in monetary policy, warning that domestic inflationary pressures remain elevated. In particular, they have highlighted developments in wage growth as crucial for determining the right time to cut rates.
Wage growth averaged 6.5 per cent in the three months to November, down from peaks of over eight per cent last summer, but still well above levels consistent with the two per cent inflation target.
The latest round of figures will be released on Tuesday, with economists expecting a further easing in wage pressures.