The ONS has reported this morning that UK CPI inflation for the year to December 2024 came in at 2.5% – slightly better than expectations – and below the 2.6% rate for November. The news will be a welcome relief for the Treasury as well as for all those hoping for an interest rate cut from the Bank of England early next month – although inflation remains well above it’s target rate of 2%.
In more good news this morning, core CPI inflation has fallen from 3.5% in November to 3.2% in December. It’s an area that’s been proving sticky of late and therefore quite a concern for market watchers in recent months.
There’s been plenty of reaction to today’s inflation news from investment strategists, economists and other experts from across the industry, as follows:
Tomasz Wieladek, chief European economist at T. Rowe Price said: “UK headline CPI inflation fell to 2.5% in December, down from 2.6% in November and below the consensus of 2.6%. Core CPI inflation fell to 3.2% from 3.5%, also below consensus. Services inflation fell to 4.4% from 5%, mainly driven by interest rate-sensitive categories. The most important factors contributing to the decline were hotels, restaurants, and recreation – all categories which reflect domestic price pressures. Importantly, services inflation came in significantly below the 4.8% consensus.
“These data challenge the idea that the MPC will only cut less than twice this year, as market pricing suggests. Four to five cuts are more likely. Headline inflation will be dominated by energy base effects for now, but today’s decline in services shows underlying inflation is also finally declining. It remains to be seen if this pace of underlying disinflation can be maintained, but overall, the data today are a clear green light for another series of cuts.
“The MPC has repeatedly said services inflation will be an important indicator in understanding if domestically generated inflation is coming down in a sustainable manner. Today’s reading of 4.4% shows services inflation is finally on the way down, and that the bank rate is significantly above the neutral rate. These data will support those MPC members who are convinced the MPC should continue to cut.
“Labour market surveys are also clearly weakening at the moment. Without reliable official data, the only conclusion is that economic conditions will support lower wage growth and inflation going forward. This will allow the MPC to cut rates four to five times this year – significantly more than market pricing.
“Gilt yields, especially at the front end of the curve, should start decoupling from the recent US-driven sell-off. The long end of the gilt curve tends to be driven by international factors. However, the two-year gilt is typically anchored by monetary policy. Today’s data show a very different economic path in the UK than in the US. Gilt yields, especially at the short end of the curve, should start reflecting this. They will likely be less responsive to further US sell-offs going forward.”
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“The small tick down in inflation will be met with a big sigh of relief in both the Treasury and the Bank of England. Another disappointing print could have led to a further sharp rise in gilt yields, piling further pressure on the Chancellor. There are still material growth and inflation risks facing the UK economy, with policymakers highly focused on seeing how firms will respond to the increase in national insurance and minimum wage coming this spring. But for now, this slightly softer report should help reassure investors that the BoE can continue with its gradual easing cycle, and we expect the next rate cut in February.”
covering the latest UK inflation figures, please find comments below from
Lindsay James, investment strategist at Quilter Investors said:
“CPI data for December shows a modest easing in price pressure, with headline inflation falling to 2.5% from 2.6% the previous month. This rounds off a year marked by a resurgence of inflationary forces in its latter stages, prompting the Bank of England to diverge from the ECB and the Federal Reserve by keeping interest rates flat at 4.75% during the December meeting.
“The month-on-month rate accelerated to 0.3% from 0.1% in November, while core inflation, which strips out volatile food and energy prices, ticked down more convincingly to 3.2%, from 3.5% in the prior month.
“The primary drivers of inflation in December were rising costs for transportation, household services, whilst clothing, restaurants and hotels saw a downward contribution.
“Services inflation, which stood at 4.4%, down from 5% in November, remains a major focus as wage inflation stays well above the 2% target. Employers’ responses to the autumn budget suggest that cuts to headcount and price hikes are the most likely outcomes. While these measures may eventually dampen wage inflation, in the near term, public sector pay rises of around 5-6%, combined with ongoing labour shortages in parts of the service economy, continue to drive elevated levels of wage growth. With wages accounting for around 60% of the costs within the service sector, this remains a significant obstacle to further interest rate cuts.
“At its December meeting, the Bank of England also highlighted rising risks from geopolitical tensions and trade policy uncertainty. With energy prices increasing due to further pressure on European gas supplies amidst a cold weather snap and ongoing global trade frictions, it is unsurprising that consumers are raising their inflation expectations in the year ahead. This shift in expectations can alter consumer spending decisions and become a more potent driver of future inflation.
“Markets are now sceptical about the prospect of further rate cuts in the UK before May, pricing in less than two quarter-point cuts for the year as a whole. While this data will show some encouraging signs of progress, much of this is negated once mortgage costs are factored in with CPIH, the CPI index including owner occupiers’ housing costs, remaining unchanged at an annual rate of 3.5%. With government bond yields rising in recent weeks, the upward pressure on mortgages remains in place. Consequently, the UK economy is unlikely to experience interest rate cuts in the near term, adding to the headaches at the Treasury as growth is likely to remain anaemic.
“While the most likely outcome remains weak growth and slowing inflationary pressure as we move through the year, the increasing frailty to the UK economy suggests that the risk of recession, though still modest, appears to be increasing.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) commented:
“After a difficult start to the year, this morning’s inflation print will provide some relief to Chancellor Reeves. A sticky print could have been a catalyst for further volatility in the gilt market but fortunately, we saw a notable downside surprise, particularly in the services sector.
“We are not out of the woods yet, however, and the inflation dynamics could prove challenging this year. Inflation was already anticipated to accelerate in 2025 due to unfavourable base effects, but the policies announced in the October Budget have added fuel to the fire.
“Businesses have signalled that they intend to respond to the hike on employer’s National Insurance contributions by increasing prices to maintain profit margins, while simultaneously reducing hiring. Therefore, while across the Atlantic they are experiencing sticky inflation with strong growth, and on the continent, weaker inflation alongside stagnant growth, here in the UK, we are likely to experience challenges across both fronts.”
Commenting on the latest CPI data from the ONS, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“In a welcome relief to the beleaguered government, inflation, as measured by the CPI, came in at 2.5% till December 2024, down from 2.6% in November. On a monthly basis, CPI rose by 0.3% in December, compared to the 0.4% in November. The better news is it came in lower than was expected by the street, which expected no change.
“While there will be a rush to put forward the positives, one should always remember that this is just one reading of an indicator and should be taken as it is. What is more important is the trend of the CPI Index, which over time has tended to be stickier than expected. In addition to the word that the current budget proposals of investment for growth could possibly be inflationary has resulted in the Gilt markets to sell off, as participants slowly scratch off the number of expected rate cuts. While there has been no significant change in fundamentals, both in government and Bank of England policy, it seems that the markets, having driven the pricing to unwarranted levels, is now upset about the correction that invariably occurs. The BoE is already in a holding pattern and this new print does not appear to do anything to change it.”
Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin said: “December’s inflation release was good news for the chancellor and the Bank of England. The headline rate of inflation slowed which was an unexpected, pleasant surprise.
“Sometimes the devil is in the detail and it is worth noting that there is some upside risk here from hotel and air fares which dragged down services inflation but should rebound in January.
“To avoid these discrepancies, we tend to look at median price growth – which slowed slightly in December, and services inflation annualised and seasonally adjusted. These points suggest inflation remains above target, but services in particular should slow substantially from the rapid, year on year rate which we have been experiencing.
“Inflation remains something of a British disease, but these data make it seem less bad than before.”
Ed Monk, Associate Director, Fidelity International, comments: “The slight dip in inflation in December is good news and revives hopes that expected rate cuts can still come through this year. The market view of where rates will land has been shifting, with one fewer rate cut now expected in 2025 than was the case a month ago. Markets ahead of the inflation print were suggesting another two cuts this year. Today’s reading keeps that on track for now.
“But it doesn’t remove the dilemma for the Bank of England or Downing Street. Inflation is stubbornly above target while growth has begun to slowdown – that’s the path to ‘stagflation’. GDP numbers for November, due on Friday, will tell us more about whether the economy shrank overall in the final quarter of 2024. Higher rates are restricting economic activity, but the Bank clearly still fears any loosening of borrowing cost could let price rises accelerate, heaping yet more pressure on households.
“None of this is good news for UK investors. UK shares look cheap versus other regions but they need a catalyst to rerate higher. Inflation may have to come down further and growth will have to pick up for that to happen.”
Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners, commented:
“While the December inflation data came in below economists’ expectations it remains stubbornly high and is expected by the Bank of England (BoE) to accelerate a little over the course of 2025.
“In the data, services CPI inflation remains elevated at 4.4% year-over-year, about twice the rate it was in December 2019, before the pandemic. Within services, there are still pockets of inflation, like rents in the housing category, which are running north of 7% per year. Outside of services, goods CPI inflation came in at 0.7% year-on-year and remains a drag on the overall rate of inflation.
“Looking further on, the UK inflation trajectory will be complicated by the demand boost from the budget at the end of October after the government relaxed fiscal rules. The hike in the National Minimum Wage and Employers National Insurance (both from April) and its impact on encouraging “producers to raise prices to maintain profit margins is another consideration for the BoE. Rising crude oil prices, where Brent has now moved north of $80/barrel, its highest level since last summer, is also worth monitoring as a source of inflation.
“The next opportunity for the BoE to cut interest rates is at the 6 February meeting. The future markets largely expect the BoE to lower rates by 25bps to 4.5% at this meeting.
“Potentially, sticky inflation may lead to the BoE taking a more modest approach in cutting interest rates over the course of 2025. This comes at a time when confidence in the gilt market appears fragile, with the 10-year yield trading at 4.9%, its highest level since the Global Financial Crisis in 2008. A key test for the gilt market is when the Office of Budget Responsibility publishes its economic outlook for the UK and public finances in its 26 March Spring forecast. If economic growth is revised lower, the government may need to raise taxes and/or cut spending to meet its fiscal projections and ensure its credibility with the gilt market.
“Despite the volatility seen in the gilt market, the UK equity market has been resilient and is up slightly year-to-date. That’s largely due to relatively solid global economic growth, policy easing and technological innovation lifting most developed equity markets. A weaker sterling exchange rate against the dollar may also help UK stocks as dollar-denominated earnings from overseas are repatriated back home.”
Professor Sarwar Khawaja FRSA, chairman, executive board, Oxford Business College, said: “A slight drop in headline inflation might give businesses hope that the economy is heading in the right direction, but there are still major issues for leaders to grapple with.
“Core inflation at 3.2% remains well above the Bank of England’s 2% target, suggesting that stubborn price pressures are firmly embedded in the economy.
“And services inflation running at 4.4% indicates that wage pressures continue to feed through to consumer prices.
“Of particular concern is the housing sector, where owner-occupiers’ housing costs are rising at 8%, which is the highest rate since 1992. This is a significant squeeze on household budgets at a time when many are still adjusting to higher mortgage costs.
“It’s a bonus to see signs of cooling in restaurant prices and transport costs continuing to fall, the overall economic picture remains challenging. The rise in food and non-alcoholic beverage prices continues to impact household budgets.
“Businesses are looking to Rachel Reeves to see what her next steps will be, as the next few months will be critical in preventing full-blown economic meltdown.”
UK inflation pressures eased over the holidays, points out Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments: “This morning’s data shows that UK inflation increased over December, but by a lower margin than expected – 2.5%, over a forecast 2.7%. This marks a minute downturn from 2.6% in November, though pressures nonetheless continue to mount from September’s epochal low 1.7%.
“An amalgamation of influences has driven this outturn, notably restaurant and hotel prices, but there is little evidence, as yet, of businesses looking to get ahead of Budget measures which will increase costs, including national insurance contributions by raising prices.
“The Bank has continued to warn that price pressures are persistent, underpinning its gradual approach to rate setting. But, despite the upturn, the Bank’s Monetary Policy Committee will take some comfort today from the small drop in underlying CPI, reflecting ebbing price pressures in volatile components. Services prices also decreased to 4.4% in December and are now below the official forecast of 4.7%.”
“Monetary policymaking currently stands at a delicate juncture. On the one hand, today’s inflation data confirms persistent, if lower than expected price pressures, while on the other, economic activity is depressed and household and business sentiment subdued. With the next rate decision coming in early February, these concerns will be front of mind for the Committee and the Chancellor.”
