This week’s official inflation rate is now expected to show a possible rise, rather than a fall.
Although there is widespread expectation that the headline inflation rate will drop to 2.0 per cent towards the summer, it’s now thought likely that the next figure - to be revealed on Wednesday, February 14 - may well show an increase.
This comes on top of a surprise inflation rise a month ago when the annual figure n the 12 months to December 2023 increased marginally from 3.9 to 4.0 per cent.
Now another rise is on the cards because of the increase in the energy price cap.
Susannah Streeter, head of money and markets at business consultancy Hargreaves Lansdown, says: “After a dismal December, when the price spiral unhelpfully inched back up to 4.0 per cent, 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 widened across retail. Food price rises also decelerated to their slowest since May 2022, according to the British Retail Consortium.
“With the economy expected to have slipped into a recession at the end of last year, demand is expected to weaken further. Inflation is expected to dip significantly lower in the months to come, towards the Bank of England’s target in the Spring, when lower wholesale gas prices will be felt.”
But Streeter is one of many analysts to says that even when inflation does eventually hit 2.0 per cent, there will be no immediate cut in interest rates announced by the Bank of England.
She continues: “Bank of England policymakers are largely a highly cautious bunch, and are concerned that inflation may take off again. They will want more evidence that inflation-busting pay rises are also coming down quickly before they make a move. Any potential tax sweeteners to woo voters in the [March 6] Budget will also be wild cards to handle, while it’s still unclear if disruption in the Red Sea will push up goods prices.”
Hargreaves Lansdown says the quick-fire mortgage cuts we saw at the start of the year have already stalled, and the average rates have risen very slightly as the market digests the fact inflation is proving tough to shift.
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