UK Inflation Update for December

The United Kingdom (TADAWUL:4280) reported a surprising dip in inflation for December, with the rate falling to 2.5% from November’s 2.6%, coming in below the consensus forecast of 2.6%.

This decline was primarily attributed to a decrease in services inflation, which dropped from 5.0% to 4.4%, undershooting the consensus of 4.8% and the Bank of England’s (BoE) forecast by 30 basis points.

Components of Volatility

The components contributing to the volatility in services inflation include:
– Airlines
– Packaged holidays
– Education
– Accommodation

However, the core services inflation, excluding these erratic components, showed a marginal decrease from 5.3% to 5.2%.

Implications for Monetary Policy

The unexpected easing in inflation has solidified expectations of an interest rate cut by the BoE in February.

Economists at Bank of America (BofA) suggest that the lower-than-anticipated inflation figures are likely to align market expectations with the BoE’s indicated trajectory of quarterly rate cuts.

BofA also indicated that this latest data could alleviate some of the recent pressure on UK financial assets, which have been affected by concerns of stagflation – a combination of stagnant economic growth and high inflation.

The reduction in services inflation, especially in volatile sectors, points to a less persistent inflationary environment than previously thought. This could influence the BoE’s monetary policy decisions in the coming months, as the central bank aims to navigate the economy through a period of economic uncertainty.

Cautions Moving Forward

However, BofA analysts noted, “we still think the BoE would be cautious, stick to the quarterly pace of cutting and not speed up cuts on the back of this miss as 1) erratic components explain some of the downside surprise 2) companies seem to be highlighting that they are passing higher National Insurance Contributions (NICs) more strongly to prices, which is still to come through.”

“The rise in National Living Wage (NLW), NICs, and energy prices should push inflation higher in coming months, which should keep the BoE cautious.”

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