Why it matters: Rishi Sunak has delivered on his inflation pledge.
About a year ago, with inflation exceeding 10%, Prime Minister Rishi Sunak made several pledges to the British people on the economy, immigration and health services. Wednesday’s data confirms that he has met one of those – cutting Britain’s inflation rate in half. It is a much-needed win for the government as it begins an election year with Mr Sunak’s political party slipping in the polls.
But even as households feel relieved that prices are not rising as quickly, the cumulative effect of high inflation is still being felt. For example, prices of food and non-alcoholic beverages have risen by 26 percent in the past two years.
The magic number: When will Britain reach 2% inflation?
Mr Sunak’s target was to halve inflation, but the Bank of England, which is responsible for controlling inflation, has a mandate to cut it to 2 per cent and has aggressively raised interest rates to do so.
The situation seems to be changing very quickly now. Inflation could fall to 2% by the spring, around April or May, according to economists at Goldman Sachs, ING, Oxford Economics and elsewhere. This would reach the target about a year and a half earlier than the Bank of England recently forecast.
But it is important whether inflation will remain at 2%. There, the data is less certain, according to Michael Saunders of the Oxford University of Economics and a former interest rate-setter at the Bank of England.
The decline in headline inflation reflects a decline in global commodity and energy prices, “rather than a significant slowdown in underlying domestic inflation pressures,” Saunders wrote in a note this week. He added that wage growth and price pressures in services will be slower to decline and are likely to remain above levels consistent with 2 percent inflation.
Data published on Tuesday showed that annual wage growth reached 6.6 percent in the period from September to November. Services inflation was 6.4 percent, slightly higher than in November. Core inflation, which excludes food and energy prices, was 5.1 percent, the same as the previous month.
Risks ahead: Shipping disruptions could lead to price increases.
There are some concerns that inflation’s downward momentum may stall as conflict in the Middle East drives up the cost of energy and consumer goods due to shipping disruptions in the Red Sea. As ships travel long distances around the southern coast of Africa, Shipping cost increasedThese increases can make their way to consumers.
Last week, the head of Tesco, Britain’s largest grocery retailer, warned against this Prices of some items may increaseBut he said it was too early to know. Marks & Spencer said it may need to absorb higher costs, and there may be some costs Delays in new clothes in the next two months. Retailer Next also warned of delays in stock deliveries.
What’s next: New forecasts from the central bank.
In about two weeks, the Bank of England will publish its latest forecasts for inflation and economic growth, which traders and analysts will parse for clues on how quickly it can cut interest rates from their current levels, which are the highest since 2008 at 5.25 percent. .
Amid the sharp decline in inflation, traders are betting that the first cut will come during the second quarter of the year – certainly by June, but perhaps in May. By the end of the year, traders are betting that interest rates will return below 4 percent.