Economic Monitor: Outlook for inflation improves

The Bank of England (BoE), yesterday, voted to keep interest rates unchanged at 5.25%, stressing the need to keep rates elevated until inflation sustainably returns to the 2% target. Nonetheless, the economic growth outlook improved marginally, and 40% lower gas prices since the end of 2023 are feeding through into a rosier inflation outlook.

Consumer confidence continued its improvement and perceptions surrounding economic conditions are finally escaping negative territory. Service providers report improving demand as a result of lower borrowing costs, suggestive of improving momentum. However, business budgets remain constrained by elevated cost pressures, particularly labour costs.

Inflation is now forecast by the BoE to temporarily return to the 2% target in Q2 2024, due to lower energy bills, before increasing slightly to 2.4% by year-end as the contribution of energy bills to the Consumer Price Index (CPI) becomes less negative. It then sustainably returns to target during the middle of 2025. However, upside risks remain in play, with a close to tripling in shipping costs, and an uncertain future trajectory of oil prices that could jeopardise a smooth decline in the CPI.

• GDP grew in November by 0.3%, following a fall of 0.3% in October. Services activity grew and the largest upward contributors were information and communication activities as well as wholesale and retail trade. Consumer-facing services also grew, with the biggest upward contributor being wholesale and retail trade, though in contrast travel agencies, tour operators and other related activities provided the largest negative contribution.
• Inflation fell in December and the Consumer Price Index rose to 4.0%. Of the headline rate, 0.9% emanates from food, 1.0% from restaurants and hotels and 0.8% from recreation and culture. Housing and energy costs are now pushing down on inflation, shaving off 0.5% from the headline figure. Fuel prices fell for both petrol and diesel, with these figures registered when petrol was £1.43 per litre and diesel £1.51.
• The BRC-KPMG measure of retail sales growth decelerated to 1.7% in December, down from 2.7% in November.
• In the three months to November, average regular pay (excluding bonuses) was estimated at £623 per week in nominal terms (not adjusted for inflation), higher than the estimate for a year earlier (£588 per week) and £480 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£472 per week).