Inflation remains at near a 40-year high – but finally, we’re starting to see some signs of good news. This morning’s update from the Office for National Statistics shows CPI falling to 10.1 per cent in the 12 months to January 2023, down from 10.5 per cent in December 2022.
It’s a better update compared to January, which revealed a much smaller dip in CPI between November and December last year. Core inflation – which excludes energy and food – fell too, from 6.3 per cent on the year in December down to 5.8 per cent in January. Crucially, this easing beat the consensus, both for CPI (the expectation was 10.2 per cent) and for core inflation (expected to remain at 6.3 per cent).
This keeps the Bank’s forecast for a dramatic fall in inflation this year on track, while that reduction to core inflation will ease worries – slightly – that these price hikes are getting baked into the system.
The biggest contributors to the downward pressure on inflation were transport and hotels and restaurants. The former eased significantly, from 6.9 per cent on the year in December, down to 3.4 per cent in January, thanks in part to further falls in fuel prices, from 11.5 per cent in December down to 7.7 per cent in January. This easing in the services industry – hotels and restaurants saw inflation ease to 10.8 per cent last month, from 11.3 per cent in December – reflects yesterday’s labour market update which showed that, gradually, vacancies are falling and the ‘economically inactive’ are slowly returning to work.
Despite getting some of the best news we’ve had on inflation in some time, inflation still remained in the double-digits last month. Real pay was down 3.1 per cent in the three months leading up to December last year, as price hikes continue to off-set average pay hikes, leaving people feeling worse-off. And not all prices are moving in the right direction. Food inflation remains unchanged from last month’s update: still sky-high, at 16.8 per cent on the year.
How might today’s update impact the Bank of England’s next decision on interest rates? We know from the last Monetary Policy Committee report that the Bank is hesitant to take rates higher – currently at 4 per cent – without seeing more evidence of ‘persistent pressures’. The Bank, with its dovish tendencies, may be eager to interpret faster overall easing as a reason to hold fire and forgo another base rate hike next month, or opt for a smaller rise.
But the market expectation is still for at least one more rate rise. After all, the numbers might be moving in the right direction, but it’s a long way back down to the Bank’s 2 per cent target.
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