Why it matters: Rishi Sunak keeps his inflation pledge.
Almost a year ago, when inflation was above 10 percent, Prime Minister Rishi Sunak made a series of promises to the British public on the economy, immigration and healthcare. Wednesday’s data confirms that he met one of them – to halve Britain’s inflation rate. This is a much-needed victory for the government as it is the start of an election year and Mr Sunak’s political party is lagging in the polls.
But even though households may be relieved that prices are not rising so rapidly, the cumulative effect of high inflation is still being felt. For example, prices for food and non-alcohol beverages have increased 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 get it down to 2 per cent and has aggressively raised interest rates to do so.
Now the situation seems to be changing very fast. According to economists at Goldman Sachs, ING, Oxford Economics and elsewhere, inflation could fall to 2 percent around April or May as spring approaches. This would put it on target about one and a half years earlier than the Bank of England’s recent forecast.
But what matters is whether inflation remains at 2 per cent or not. And there, according to Michael Saunders of Oxford Economics and a former Bank of England rate-setter, the data is less certain.
The decline in headline inflation reflects a decline in global commodities and energy prices, “rather than a major deceleration in underlying domestic inflation pressures,” Mr Saunders wrote in a note this week. He said wage growth and price pressures in services will be slow to retreat and are likely to remain above levels consistent with 2 percent inflation.
The annual increase in wages from September to November was 6.6 percent, according to data published on Tuesday. Services inflation stood at 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 is some concern that the pace of decline in inflation could stall due to conflict in the Middle East, which would lead to higher costs of energy and consumer goods due to disruptions to shipping in the Red Sea. As ships make the long journey around the southern coast of Africa, Shipping costs have increasedAnd these increases may make their way to consumers.
Last week, the head of Britain’s largest grocery retailer Tesco warned that Prices of some items may increase, but said it was too early to tell. Marks & Spencer said it may need to bear higher costs and may have some Delay in new clothes in next two months, retail seller Next has also warned of delays in stock deliveries.
What’s next: The central bank’s new forecasts.
In about two weeks, the Bank of England will publish its latest projections on inflation and economic growth, which traders and analysts will analyze to determine how quickly interest rates can be cut from their current level of 5.25 percent, the highest since 2008. Is. ,
Amid a sharp decline in inflation, traders are betting that the first cuts will come during the second quarter of the year – certainly by June, but perhaps also in May. Traders are betting that rates will fall below 4 percent by the end of the year.