Why it matters: Rishi Sunak kept his inflation promise.
About a year ago, when inflation was above 10%, Prime Minister Rishi Sunak made several promises to the British public on the economy, migration and health services. Wednesday’s data confirms that he has achieved one of those goals: halving Britain’s inflation rate. It is a well-deserved victory for the government as it enters an election year with Mr Sunak’s political party trailing in the polls.
But while households may be relieved that prices aren’t rising as quickly, the cumulative impact of high inflation is still being felt. For example, prices of food and non-alcoholic beverages have increased by 26 percent over the past two years.
The magic number: how soon will Britain reach 2% inflation?
Mr Sunak’s aim was to halve the inflation rate, but the Bank of England, which is responsible for controlling inflation, has a mandate to bring it down to 2 per cent and has increased by aggressively raise interest rates to do this.
The situation seems to be evolving quite quickly now. Inflation could fall to 2% as early as spring, around April or May, according to economists at Goldman Sachs, ING, Oxford Economics and others. That would bring it to the target about a year and a half earlier than the Bank of England had recently predicted.
But it is important that inflation remains at 2 percent. And there, the data is less certain, according to Michael Saunders of Oxford Economics and former rate regulator at the Bank of England.
The decline in headline inflation reflects a decline in global goods and energy prices, “rather than a major slowdown in underlying domestic inflationary pressures,” Mr. Saunders wrote in a note this week. Wage growth and price pressures in services will take longer to recede and are expected to remain above levels consistent with 2 percent inflation, he added.
Annual wage growth was 6.6 percent from September to November, according to data released Tuesday. 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.
Future risks: disruptions to maritime transport could fuel price increases.
Some fear that the downward momentum in inflation could be halted by the conflict in the Middle East, which would drive up the cost of energy and consumer goods due to disruptions to shipping in the Red Sea. As ships travel long distances around the southern coast of Africa, shipping cost increasedand these increases could reach consumers.
Last week the director of Tesco, Britain’s largest food retailer, warned that prices of some items may be increased, but said it was too early to tell. Marks & Spencer said it may have to absorb higher costs and there could be delays in delivery of new clothes over the next two months. The retailer Next also warned of delays in stock deliveries.
And then: New forecasts from the central bank.
In about two weeks, the Bank of England will release its latest projections for inflation and economic growth, which traders and analysts will analyze for clues about how quickly interest rates could be cut from their current levels, which are the highest since 2008 at 5.25 percent. .
Amid a sharp decline in inflation, traders are betting that the first reduction will come in the second quarter of the year – certainly by June, but perhaps as early as May. By the end of the year, traders are betting that rates will return below 4 percent.
