The latest UK inflation figures from the ONS issued today bring unwelcome news. Data reveal that UK CPI inflation surged to 3% in the year to January—outpacing City forecasts of 2.8% and hitting a 10-month high.
Driving this latest spike were rising costs of essentials like bread, meat, and private school fees, underscoring the ongoing cost-of-living squeeze. Consumers continue to feel the strain, while businesses remain under pressure. All eyes are now on the Bank of England’s Monetary Policy Committee (MPC) ahead of its next interest rate decision. While the Bank has anticipated inflation rising into the summer, it has also been preparing for potential rate cuts amid sluggish economic growth. Could today’s data shift that outlook?
Investment strategists, economists and fund managers have been sharing their reaction to the latest inflation news with Wealth DFM as follows:
Luke Bartholomew, Deputy Chief Economist, abrdn, said: “Inflation was always going to jump higher today, but the size of the increase is a bit of disappointment. However, measures of underlying inflation were actually a bit more encouraging, with services inflation coming in slightly weaker than expected. While key Bank of England policymakers recently sounded more concerned about the growth rather than inflation outlook, there is probably not enough in this report to materially move the dial on the near term outlook for policy. Another rate cut in March looks pretty unlikely, with the Bank continuing with its gradual pace of easing for now. But any speeding up of the pace of rate cuts in the second half of the year will depend on inflation pressures heading back towards 2%”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) said: “This week’s data will cause quite the headache for the Bank of England and raises questions about the decision to cut interest rates this month. Hot on the heels of strong wage data yesterday, this morning’s hotter-than-expected inflation print will raise alarm bells at Threadneedle Street. With the hike in employer taxes and the minimum wage increase still coming down the tracks, it is hard to see how inflation dynamics will improve meaningfully in the near term.
“Some members of the Monetary Policy Committee have expressed concerns around growth weakness but, in my view, any slowing in the labour market will likely be limited as firms are compelled to hoard workers amid ongoing labour shortages. The Bank should, therefore, place greater weight on the upside inflation risks as opposed to any moderate cooling in economic activity. If the Bank decides to take its foot off the brake too quickly, it would be far more painful to re-anchor inflation expectations further down the line.”
Richard Carter, head of fixed interest research at Quilter Cheviot comments: “Inflation is on the rise once again in the UK, with the headline CPI figure coming in at 3.0% in January, following what had been a slight downturn to 2.5% in December. Some of this uptick is owed to VAT being added to private school fees, which came into effect on 1 January and saw prices increase by 12.7%. Steep increases in transport costs, particularly in air fares, and food were also major factors behind the rise. More concerningly core inflation, which doesn’t include the more volatile food or energy prices, ticked up to 3.7%, from 3.2% in the prior month.
“The Bank of England opted to cut its base rate by a further 0.25% earlier this month in an effort to boost what had been a flatlining economy. Data out since then showed monthly real GDP grew 0.4% in December, which was considerably better than had been anticipated, but on a quarterly basis this amounted to only a minimal 0.1% lift.
“While the surprise uptick in December will have been welcomed, the outlook is still concerning and forecasts for the year ahead have been slashed. Growth will remain at the top of the Bank’s agenda, and it will no doubt be hoping that its latest rate cut will start to stimulate the economy. However, it will take some time to feed through so we can expect a relatively sluggish start to the year in the meantime.
“At its latest monetary policy meeting, the Bank also provided an updated prediction on inflation, suggesting it will peak at 3.7% in Q3 this year. Given its previous forecasts, this was a rather shocking uplift. The BoE seemingly wants to look through the expected upcoming spike in inflation and instead focus on cutting rates to boost growth, but this can only go so far.
“Labour market figures out yesterday are indicative of continued wage growth pressures, with total pay, including bonuses, accelerating to 6% in the final quarter of 2024. Such strong pay growth could further confuse matters for the BoE, as it will need to balance concerns over a struggling economy with the risk that the continued rise in earnings could slow disinflation.
“Should the spike in inflation peak at a level above expectations, or if the increase is too prolonged, then the Bank could find itself with a nasty headache. ‘Stagflation’ is a word that will have haunted the BoE in recent years, and we could see a resurgence in the coming months should the UK economy not respond as hoped.”
Tom Stevenson, investment director at Fidelity International, said: “The jump in January inflation to 3.0% was worse than expected and unwelcome. Higher airfares and the introduction of VAT on private school fees meant December’s move back towards the inflation target was always likely to be reversed in the New Year. But the outcome was significantly higher than the 2.8% forecast by most economists.
“This month’s spike looks like being the start of a tricky six months on the growth and inflation front. The Bank of England recently warned that rising energy prices would see inflation reaching 3.7% by the third quarter of this year. At the same time, the economy is stagnating, with barely any growth at all in the six months since last year’s election.
“Rising wage growth, which hit 5.9% this week, is also driving headline inflation higher, although that factor may go into reverse as businesses rein in their hiring plans ahead of April’s hike in employer national insurance contributions. Cost of living pressures are pushing grocery inflation down as shoppers turn to non-branded products to manage the price of the weekly shop. A number of services, like broadband and phone deals, with index-linked contract renewals due in the spring, could see prices rise less slowly than they did a year ago.
“This push and pull on inflation complicates the Bank’s policymaking. It cut the base rate by a quarter point to 4.5% earlier this month, with two members of the monetary policy committee calling for a larger cut of half a percentage point. But persistent above target inflation supports its ‘gradual and careful’ approach to cutting the cost of borrowing. Most economists expect rates to fall to about 4% by the end of the year.
“For investors, even a modest reduction in interest rates should keep downward pressure on the pound because the Federal Reserve looks unlikely to cut the cost of borrowing at the same rate in the US. That should provide a tailwind for the FTSE 100. Exporters and overseas earners which dominate the UK benchmark index benefit from weak sterling.”
James Lynch. Investment manager at Aegon Asset Management: “Mixed bag for the inflation numbers out of the UK this morning. Headline Consumer Prices Index (CPI) came in higher than expected at 3.0% against 2.8% expected, but the services component ‘only’ came in at 5.0% against 5.1% expected.
According to the Office for National Statistics, the largest upward contributions came from food and transport costs, and goods inflation also came in strong. Given the backdrop this year with the National Insurance Contribution rise and National Living Wage rise coming, how businesses will react to the increase in cost base will be important for Band of England policy rates. The sectors that are going to be impacted are more likely to be low margin, with higher labour costs, such as retail and hospitality – so the increase in food costs in January (which came in at 3.1%) is something to keep an eye on in case this is a start of a trend in 2025.
For now, it is enough not to change Bank of England messaging as there is something for everyone in this inflation print and as such don’t expect any change in market rates on the back of this.”
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “This morning’s data confirms that near-term price pressures have increased once again, with consumer price inflation reaching almost double the Bank of England’s 2% target last month. While the Monetary Policy Committee may want to view rising inflation as temporary, today’s numbers suggest it could be a while before the base rate is cut again.
“Recent government policy and regulatory price changes have strongly implied that inflation might be on the rise and so it has proved. The impact of the introduction of VAT on private school fees, along with rising fuel prices, air fares and bus fares were always likely to drive prices up. Similarly, underlying consumer price inflation rebounded from a dip in December, with service sector price pressures in evidence.
“The key question for the Committee is how transitory these price pressures will be. Two weeks ago, the Committee voted unanimously in favour of cutting the base rate, with two members preferring to cut it by more than just 0.25 percentage points. Since then, Chief Economist Mr Huw Pill has cautioned against cutting interest rates in haste, despite pedestrian economic activity, on the basis that inflation is yet to be curbed. Today’s data vindicates this steadfast commitment to a gradual approach to further policy easing.
“Yesterday’s employment data, a key measure by which the Bank assess price increases, also confirmed that upward wage pressures remain in evidence. This gives no indication that monetary policy can further assist economic recovery in the short term. With this in mind, financial market pricing indicates that it may not be until June that we see another interest rate cut.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said:
“Headline inflation came in at the highest rate in about 10 months but arguably the labour market report yesterday is more of a problem for the MPC than the inflation data today. Of course, neither helps those looking for a March cut from the BoE. The labour market continues to gradually loosen, although revisions show it is at a slower rate than initially feared. It is also generating very strong wage growth, meaning it is going to be difficult for the Bank to forecast materially lower inflation over the forecast horizon. The combination means that the “gradual and careful” rate-cutting strategy from the BoE is going to continue.“
Jochen Stanzl, Chief Market Analyst at CMC Markets said: “The report indicates that inflationary pressures are intensifying on a year‑over‑year basis. We’re facing continuing inflationary pressures. The hoped-for turnaround in inflation falls through. The significant annual increases in both CPIH and CPI—especially the upward shifts in core inflation—confirm that underlying price pressures are building. This is largely driven by higher transport and food prices, with owner occupiers’ housing costs remaining stubbornly high.
The data suggests that the UK is likely to face continued inflation above the BoE’s target. Policymakers might therefore need to consider further interventions or be prepared for a prolonged period of inflationary pressure, which could complicate efforts to stimulate economic growth.
Overall the upward trend in annual rates and core inflation supports the view that inflation remains a significant and persistent challenge for the UK economy in 2025.”
Daniela Sabin Hathorn, senior market analyst at Capital.com said: “The Bank of England (BoE) has projected that inflation will rise to 3.7% later this year, driven by increasing energy prices and a series of utility bill hikes impacting businesses and households alike. However, the latest data indicate that inflationary pressures extend beyond energy costs, as core CPI also climbed significantly in January. This development could constrain the BoE’s ability to lower interest rates in the near term.
“Following the data release, market pricing shifted to reflect a fully priced-in 25 basis point (bps) rate cut for June, whereas May had been the favored timing prior to the announcement. The probability of a May rate cut now stands at 60%, but the stronger-than-expected inflation figures have dampened market conviction. As a result, investors will closely scrutinize upcoming BoE commentary for further guidance.“
