Markets still reckon that consumer price inflation (CPI) will have fallen the Bank of England’s target by May, at which point the Bank of England (BoE) should be able to start cutting base rates. If so, that will be a real boost for the economy, because we really need to see inflation falling and fast.
Nobody needs it more than Prime Minister Rishi Sunak and Chancellor Jeremy Hunt, who desperately need the cost-of-living to end to have any chance of winning the next election.
If CPI is falling, people will feel richer, especially homeowners, as mortgage rates will continue to slide.
So it’s an irony that Sunak and Hunt are partly to blame for today’s inflation hop, from 3.8 percent in November to four percent in December.
Grant Fitzner, chief economist at the Office for National Statistics, pinned the increase on “rises in tobacco prices due to recently introduced duty increases”.
So that’s yet more harm inflicted by the government’s repeated tax grabs.
There are other reasons why we shouldn’t panic too much about today’s increase. Inflation was also driven upwards by a huge 57.1 percent jump in airfares in December.
That’s likely to be a one-off. Also, flying is a luxury that won’t have much impact on the poorest, who are more concerned about how to pay for their food or heating.
As economist Julian Jessop has pointed out, “one month’s small miss does not change the bigger picture”.
And the bigger picture is that inflation is on the run, and faster than we expected just a few months ago.
It certainly falling faster than the Bank of England protected. It predicted that inflation would be 4.6 percent in December.
Nobody else thought that, by the way. BoE forecasts are typically wildly different to everybody else’s, and typically wrong, too.
There’s a chance that inflation could climb again when January is figure is published, thanks to the increase in the energy cap. It could climb as high as 4.5 percent.
That’s what Thomas Pugh, economist at auditor RSM UK, reckons. He anticipates a bumpy start to the year, but has good news thereafter.
He says inflation will fall below the BoE target of two percent in May.
Pugh says that will “open the door” to a base rate cut in May, which would be brilliant news. Even the BoE’s monetary policy committee (MPC) cannot justify keeping base rates at a 16 year high once it inflation has been defeated.
Although you never know.
The MPC is notoriously behind the curve and could delay any rate cut until every homeowner in the land is screaming for respite from higher borrowing costs.
The BoE lives in fear of a wage-price spiral. Governor Andrew Bailey and chief economist Huw Pill earn very nice salaries but are worried about the rest of us getting too much money.
READ MORE: Inflation back on the rise after unexpected plunge in previous report
Yet wage growth is now slowing. Yesterday’s figures showed that earnings grew by 6.6 percent in the three months to the end of November. That’s down from 7.3 percent in the three months to October.
These figures are also much lower than BoE predictions, unsurprisingly. It’s panicking about a threat that barely exists.
Inflation peaked at 11.1 percent in October 2022, so we have come along way since then. Today figure is a disappointment, but I wouldn’t be too gloomy.
Barring serious trouble in the Middle East, inflation should be back to target by the spring, and interest rates should start tumbling falling.
That’s if the BoE wakes up and notices what’s really happening, rather than what its flawed projections suggest. I’m not holding my breath on that.
