Economists are bracing for rises in the cost of living to have accelerated for a second month, as the Office for National Statistics publishes new data on inflation.
While inflation has fallen from a 41-year high of 11.1 per cent in October 2022 to below prime minister Rishi Sunak’s stated goal of 5 per cent by the end of 2023, it remains above the Bank of England’s longstanding target of 2 per cent.
While chancellor Jeremy Hunt celebrated a surprise fall to 3.9 per cent in November, the rate of inflation rose again in December to 4 per cent – and is now expected to have done so again last month.
The fresh figures, due on Wednesday morning, are expected to show that Consumer Prices Index inflation – a measure of the costs that households face – hit 4.2 per cent in January.
Economists will be watching keenly for signs on what impact the figures could have on the Bank of England’s base interest rate, which is causing pain for borrowers and homeowners struggling with higher mortgage rates.
FTSE 100 drops as interest rate concerns weigh on housebuilders
London’s markets slid in a gloomy afternoon session amid concerns over persistent inflation, reports Henry Saker-Clark.
The FTSE 100 had a cautious morning of trading but quickly dropped to its lowest point this month after hotter-than-expected US Consumer Price Index (CPI) inflation figures.
The data suggested hopes of interest rate reductions soon could be premature and particularly dented housebuilders amid concerns about the mortgage market.
London’s top index moved 0.81 per cent, or 61.41 points, lower to finish at 7,512.28, with Taylor Wimpey, Barratt Developments and Persimmon all notable fallers.
What has been happening to wages?
Wage growth has slowed to its lowest level for more than a year but is still outpacing inflation, according to official figures.
The Office for National Statistics (ONS) said average regular pay growth, excluding bonuses, fell to 6.2% in the quarter to December, down from an upwardly revised 6.7 per cent in the three months to November.
This was the slowest growth since the three months to October 2022.
But when taking Consumer Prices Index (CPI) inflation into account, real regular wages rose by 1.9 per cent – a high since summer 2019, excluding the pandemic-skewed years.
This is thanks to inflation having fallen back sharply after hitting an eye-watering 41-year high of 11.1 per cent seen in October 2022.
But the fall in wage growth was less than expected by most experts and in financial markets, with investors reining in their bets on interest rate cuts this year after the data.
Wage rise data could also impact inflation and interest rates
The higher-than-expected wage rises in Tuesday’s Office for National Statistics figures will also spark worries of delayed cuts to the Bank of England’s base interest rate – given that wage rises can push up inflation.
“Today’s wage rises contribute to tomorrow’s spending power, impacting demand and influencing inflation, so the Bank will be keenly monitoring average earnings growth in particular,” said Rob Morgan, chief investment analyst at Charles Stanley.
“Resilient wages have been a driver of sticky consumer price inflation, and they are not falling back into line as fast as the BoE (Bank of England) would like as it looks to return inflation to the 2 per cent target.
“What’s more, a further inflationary impulse could lie in wait in the form of an increase to the national minimum wage of almost 10 per cent from April, which stands to simultaneously increase costs for employers and bolster household spending power, potentially exerting further upward pressure on prices.”
How will new inflation figures impact on the Bank of England’s base interest rate?
Economists will be tracking the data to try to figure out what influence it might have on the Bank of England.
The Bank’s Monetary Policy Committee (MPC) is tasked with keeping inflation as close to 2 per cent as possible.
One of the main ways it has to do this is by changing interest rates. By increasing rates it restricts the amount of money that mortgage holders have to spend, therefore reducing demand for goods and services. That can help take pressure off prices.
So if inflation is higher than the 4.1 per cent the MPC expected in its last forecast, that could make rate setters more likely to delay cuts to the base rate.
Why have mortgage rates gone up?
Following a period of decline in borrowing costs, several major mortgage lenders have announced increases in rates in recent days, my colleague Alex Ross reports.
Mortgage rates are closely tied to swap rates, which is effectively the rate the lenders pay a financial institution for funding, and that is affected by the Bank of England’s base interest rate and inflation.
Tomorrow, experts believe inflation will go up marginally from the annual 4 per cent recorded last month.
Ken James, director at Contractor Mortgage Services, told The Independent: “Lenders at the moment are pricing in potential inflation rises.
“I think what they are doing is safeguarding. They are saying ‘we think that everything is going to rise with all these figures coming in and therefore let’s partly protect ourselves against that future rise and get it in early’.
“I think with tomorrow, because I’m pretty confident rates are going to rise with inflation, I think lenders have just done it early, I think they are just protecting themselves.”
What’s happening to your mortgage as major lender hikes rates ahead of inflation announcement
It’s been a turbulent few days for prospective and current homeowners looking for mortgages, with several major lenders announcing increases in rates after a period of decline in borrowing costs.
Nationwide, the country’s biggest building society, revealed its mortgage rates would rise by up to 0.25 percentage points on Tuesday. It comes after lenders Halifax and TSB said they were also raising rates on some of their products.
But, strangely, other lenders have gone in the other direction. Santander has announced mortgage rate cuts of 0.16 percentage points.
The mixed picture for mortgage rates comes after the Bank of England held its base rate at 5.25 per cent earlier this month. However, it is Wednesday’s release of inflation figures which appear to have resulted in what some brokers are calling a “yo-yo” market.
My colleague Alex Ross reports:
Inflation still likely to have fallen in February, economist says
Despite an expected blip in Wedesday’s figures, inflation could fall as low as 3.4 per cent in February, an economist has said.
Samuel Tombs, the chief UK economist at Pantheon Macroeconomics who believes that inflation hit 4.1 per cet in January, said that regardless of Wednesday’s data, inflation is likely to fall considerably, to 3.4 per cent, this month.
How has the rate of inflation changed in recent years?
This graphic by the PA news agency charts the rate of inflation as recorded in recent years by the Office for National Statistics:
Rising inflation could deal political blow to Sunak and Hunt
The Chancellor is expected to be dealt a blow as new data on Wednesday could show that inflation rose for the second month in a row.
If inflation rises to 4.2 per cent as is expected, it could also hurt the government’s promises to help households out by getting inflation under control.
However, this is only likely to be a short-term blip before inflation begins to fall again.
Inflation expected to have risen for second month in a row
New data from the Office for National Statistics on Wednesday could show that inflation rose for the second month in a row.
Economists expect the figures will show that Consumer Prices Index inflation – a measure of the costs that households face – rose from 4.0 per cent in December to 4.2 per cent in January.
It would be a blow for households because their costs are rising faster than at the end of last year, although inflation is still less than half where it was a year ago.
