Latest UK CPI data shows pricing pressures subdued, but not falling

With prices expected to have risen in January, today's figures will raise hopes that interest rates remain on course to be cut this summer

By Stuart Cole | @Stuart Cole | 14 February 2024


A softer inflation report for the UK this morning, which will come as a relief to the Bank of England (BoE) after yesterday’s strong labour market report. With the markets – and indeed the BoE – braced for inflation to re-accelerate in January, the better figures will go a long way to restoring hopes that the BoE will be able to begin cutting interest rates again as soon as this summer.

However, it is not a totally rosy picture. Although prices did not rise as expected, the headline and core annual rates did not actually fall, holding steady at 4.0% and 5.1% respectively, as electricity and gas prices exerted upwards pressure following the increase in the UK’s energy price cap. The concern is that even though this impact on the CPI number will be short-lived, the knock-on effect may potentially be longer lasting as this higher print may influence pay settlements as we approach the key annual wage negotiation period for many industries. The modest rise seen in the services component, from 6.4% to 6.5% (6.8% expected) will also be unwelcome, given that it is linked more closely to domestically generated cost pressures and as such is watched closely by the BoE. Much of today's increase can be explained by base effects, namely a sharp fall in the price of catering services seen in January 2023 which preceded prices rising sharply again immediately afterwards in the February. But it is the headline numbers that matter and the expectations these generate, potentially providing the more hawkish members of the Monetary Policy Committee (MPC) with the arguments needed to push back against any proposal for a near-term softening in the current policy stance. With the services sector accounting for some 80% of the UK economy, it is not a huge step to conclude that the BoE still faces a considerable challenge in its battle to get the inflation genie firmly back into its bottle.

Going forward, inflationary pressures are still expected to soften. A reduction in the energy price cap of approximately 15% is expected to be announced later this month, to be implemented from April and which alone will knock approximately -0.6% off April’s headline CPI reading. And it is also not unreasonable to expect the planned April rise in fuel duties to be postponed by the government once again, if recent history is any guide. Pipeline inflationary pressures too are also continuing to soften, with today’s PPI numbers all in negative territory. The big unknown is the services sector CPI component, where the impact of this April’s near-10% increase in the National Minimum Wage is waiting in the wings, while yesterday’s employment report, showing the labour market to be tighter than previously considered and wages growth to be dissipating only slowly, threatens to keep employee costs for services firms - around 80% of total costs - at an elevated level.

Overall, therefore, even if the BoE is breathing a sigh of relief following today’s numbers, the suggestion is that we are unlikely to see any material change in its messaging, namely that interest rates need to be maintained at their current restrictive level with any talk about the potential for interest rate cuts being seen anytime soon being batted away. And while we still expect rates to be cut this year, the probability of this happening in H2 as opposed to H1, is looking increasingly likely.