Inflation eases for second consecutive month, but…

It may not stave-off recession, according to inflation data expert

Inflation eases for second consecutive month, but…

Annual inflation in the UK rose by 10.5% in December, but was down from the 10.7% recorded in November.

Latest Consumer Price Index (CPI) figures from the Office for National Statistics (ONS) showed a dip in inflation for the second consecutive month after a four-decade high of 11.1% was posted in October.

ONS said the largest downward contribution to the change in CPI annual inflation rates between November and December 2022 came from transport, particularly motor fuels, followed by clothing and footwear, and recreation and culture.

It also identified rising prices in restaurants and hotels, and food and non-alcoholic beverages as the largest, partially offsetting upward contributors.

However, the marginal decline in the rate of inflation may not be enough to keep the UK out of recession in 2023, according to Oliver Rust, head of product at independent inflation data aggregator Truflation.

“Today’s inflation numbers from the Office for National Statistics, while nominally lower than last month, continue to paint an unpleasant picture for the UK economy, particularly when combined with wage and employment data released yesterday,” Rust said. “Both wage and employment data are flashing some worrying signals.

“As data continues to come in for 2022 and inflation comes under control, we should see wages start to catch up, however, the nominal increases will likely also decline. The UK is known for having low wages and high debt, and this will continue to be a headwind to economic growth.”

More base rate hikes coming

Rust added that economic indicators and the Bank of England’s (BoE) historical track record would suggest a base rate increase of 25 basis points (bps) in February, though it seems plausible that another increase of 50 bps will be made, especially with inflation not coming down in earnest.

Rising interest rates will put pressure on the housing market and, even with the cooling of interest rate increases in 2023, prices will likely start to fall this year, and then accelerate in 2024 before it gets better again,” he predicted.

“There is no sugar-coating it: it looks like it’s going to be another tough year for the UK economy,” he stressed. “Inflation looks set to remain high and is unlikely to return to the BoE’s 2% target anytime soon.

“This, combined with high-interest rates, wage declines, and rising unemployment, means the UK is probably progressing toward a recession – if it isn’t there already.”