CPI numbers do little to calm confusion in the financial aviary
Inflation continued to ease in January, with CPI falling 0.6% in the month, while annualised inflation slowed to 10.1% from 10.5% in December. The slowing rate of annual inflation reflects lower year-on-year growth in transport costs, particularly motor fuels, although prices remain high and rising in alcohol, tobacco and household services like energy. Inflation was forecast to come in at 10.3% (Trading Economics).
Nicholas Hyett, Investment Analyst, Wealth Club said: “Is inflation still problematically high or is it now coming under control? You could argue for either, or even both, a sign of the confused picture for inflation at present. It won’t make life easier for the policymakers, and raises questions around the future course of interest rates in particular.
“When it comes to interest rates, the financial world divides into the hawks and the doves – those who think rates will rise and those who think rates will fall. Sentiment has swung wildly between the two over the last six months, and since inflation is the key factor determining interest rate movements these numbers will have been closely watched by both sides. Unfortunately, there’s little in here to calm confusion in the financial aviary.
“For those who think inflation is on a lasting downward trend, and therefore expecting interest rate rises to slow and perhaps reverse later in the year, there’s a welcome fall in headline inflation. That’s driven by movements in transport costs, largely down to lower motor and aviation costs. That trend will continue as we lap the higher fuel costs that followed the Russian invasion of Ukraine last year, and become a major drag on overall inflation in a few months’ time.
“However, more domestically focussed inflation is gathering pace. Areas like health and recreation and culture are starting to see prices tick up, while a tight labour market and strikes across the economy are likely to drive wage costs higher later in the year. Sometimes described as “core” inflation this can be harder for central bankers to get under control – suggesting higher rates might be needed to bring price rises under control.
“There’s food for hawks and doves alike.”