After two dismal years, everybody is desperate for inflation to plunge so we can finally wave goodbye to the cost-of-living crisis. It’s an ill wind that blows nobody any good, but it’s hard to see any positives in inflation.
Skyrocketing prices have made everyone feel poorer, undermined property and share prices, and driven up the cost of servicing the UK’s £2.6trillion national debt.
We now spend more than £100billion of taxpayers’ money paying the annual interest bill on the money we have borrowed.
So we want inflation to come down – and fast.
In the run up to Christmas, the FTSE surged and mortgage rates fell as markets looked forward to as many as six interest rate cuts in 2024 as inflation plunged back to the Bank of England’s target of two percent.
Unfortunately, 2024 delivered an unwelcome reality check, as inflation crept up from November’s 3.9 percent.
There is zero chance of the BoE cutting interest rates at its next meeting on March 21, as some hoped. I wasn’t one of them. The BoE doesn’t respond to events that fast.
Former BoE chief economist Andy Haldane – the only man in Threadneedle Street who called inflation correctly – said this week that he would have already voted to cut interest rates given the UK’s slow growth rate and progress on taming inflation.
Sadly, he left the BoE in June 2021.
Only one of the nine members of the BoE’s rate-setting monetary policy committee (MPC) voted for an interest rate cut earlier this month.
Incredibly, two still voted for higher interest rates. I don’t know what world they live in, but it isn’t this one. The MPC must have shipped them in from the moon.
Let’s not be too gloomy. Food price inflation continues to slow, with some staples actually falling in price, including whole milk, down 10 percent, and butter, which fell 7.8 percent.
Clothes and household goods prices also slowed, although air travel, restaurants and hotels remain pricey, casting a shadow over our holidays.
The £94 hike in the energy price cap in January drove up the headline figure, but prices are nonetheless down 18 percent from their peak in January 2023.
Energy bills should continue to fall, unless the Middle East crisis spirals out of control and drives up the oil price.
Best of all, analysts reckon the recent inflationary pause is temporary, and there is better news ahead. It could hit the BoE’s two percent target as soon as April.
That seems hard to believe today, but it could happen. And if it does, it will really shake things up. Even the ponderous BoE may have to respond.
READ MORE: Food inflation finally slows as price rises hit lowest point in nearly two years
Accountancy group PwC has predicted that “2024 will be the year the UK turns a page”. We will be the fourth best performing G7 economy, growing faster than France, Japan and Germany.
Low income households will see living standards rise thanks to falling food and energy prices, and the upcoming increase in the National Living Wage.
The first interest rate cut will be a massive boost to sentiment. Mortgage rates will fall further and stock markets will rebound the moment even before it lands.
Some economists reckon it could come as early as May.
China is a wildcard. As it’s economy stumbles, it could spread deflation throughout the world.
Some reckon CPI could be as low as one percent to year end. In that scenario, even the sluggish BoE would have to wake up to the new reality.
The inflationary nightmare isn’t over yet, but despite today’s blip, we’re almost there.
