Inflation and interest rates will still fall this year

Julian Jessop, Economics Fellow at the free market Institute of Economic Affairs comments on the news that the inflation rate rose unexpectedly to four per cent in December

“The tick up in UK inflation to four per cent in December will probably delay the first rate cut from the Bank of England, but one small miss in one month's data does not change the big picture.

“Inflation is still likely to fall to the two per cent target in April and the markets will continue to price in large rate cuts later in the year. Inflation is still lower than the Bank of England's forecasts, which predicted an average rate of 4.6 per cent in 2023 Q4 and 4.4 per cent in 2024 Q1.

“Higher inflation in December was partly driven by a few temporary factors, including changes in tobacco duties, air fares, and several components of ‘recreation and culture'. In the meantime, the labour market continues to cool and growth in both the money supply and credit are still weak.

“Inflation will probably also be around four per cent in January, but the numbers should then drop rapidly again, especially in April when the Ofgem cap on domestic energy bills will be lowered sharply.

“There will be six MPC meetings between May and December, leaving plenty of time for the Bank to cut rates from the current 5.25 per cent - perhaps to around four per cent by the end of the year.”

Consumer price inflation, UK: December 2023