Photograph: Paul Ellis/Getty Images
For a long time, the UK’s annual inflation rate has been on a downward trend. After hitting the highest level since the 1980s as rising cost of living pressures millions of households, official figures this week could bring some rare good news.
City economists expect UK inflation to cool for a third month running in January – the exact numbers were announced on Wednesday – amid a fall in petrol prices and a broader drop in the global price of oil and gas in recent months Got help from The expectation is now for a sustained decline in the coming months, continuing a steady decline from the peak of 11.1% seen in October.
The message from the Bank of England is clear. Inflation is on course for a “sharp” decline in the coming months, fueling hopes that the worst of Britain’s cost of living crisis is now in the rearview mirror.
There are two good reasons for this. Energy costs are moving in the right direction, while the initial increase in wholesale oil and gas prices following Russia’s invasion of Ukraine last February will soon be factored into the annual inflation rate.
Rishi Sunak’s government may have a “plan” to halve UK inflation this year. But it is for reasons beyond the control of the government that inflation is falling. Barring any major shocks around the corner, rate-setter Silvana Tenrero at the bank says these factors mean inflation is “pretty much guaranteed” to fall.
However, the way forward is not clear. The cost of living remains very high with millions facing poverty this year. A decline in inflation does not necessarily mean that prices are falling for consumers; It’s just that the annual rate of growth is not as fast as last month.
Despite avoiding a recession in the last three months of 2022, economic growth will continue to creep near zero as higher prices for goods and services, along with higher borrowing costs set by banks, weigh on growth.
Analysts are still projecting inflation above 10% in January, the fastest rate in nearly four decades. Yet this may be the last month of double-digit price increases, with the only way down for forecasters.
“We have to remember that so much of the rise in headline inflation was driven by energy,” says James Smith, an economist at Dutch bank ING. “If forecasts are correct, gas prices will stay down, and bills will fall this summer, so you can see inflation getting back up to the Bank of England’s 2% target by the end of the year. Hard to imagine where we are now. Is.
However, caution remains in place after being hit by persistent economic shocks. The bank’s governor, Andrew Bailey, has warned that the central bank’s inflation forecasts pose the greatest risk of inflation remaining high in the institution’s history.
Part of the concern lies in the jobs market, where Threadneedle Street economists will get another key update this week with official data for the three months to December.
Related: It’s not paying claims that’s driving up prices in the UK. it’s profit
For the year ahead, the expectation is that an economy struggling for momentum will see declining hiring demand from employers, and therefore weaker wage growth. However, should the jobs market remain strong, and companies confident enough to raise their prices, high rates of inflation could persist.
Most economists think it’s too early to tell from this week’s jobs data alone, with growing expectations they will show wage growth picked up slightly before inflation is taken into account. Yet occupational surveys and evidence gathered from the bank’s network indicate that the job market is letting out steam.
Wage hikes will also remain below the current high inflation rate for some time, meaning a serious hit to the standard of living of millions of workers – especially in the public sector, where wage hikes are half that of the private sector.
Rarely may be good news for inflation, but it is only a small step. Despite the expected fall in the annual inflation rate, it will take longer for the UK to recover from the cost of living crisis.
