Closing post: Bank of England governor says more evidence of slower wages needed
Bank of England governor Andrew Bailey has said that he wants to see more evidence of slowing wage growth before being confident that inflation will return to target, in evidence to parliament on Wednesday.
Bailey said that the latest wage growth figures showed signs that pay rises were slowing, but not as far as the Bank expected, in testimony to the House of Lords economic affairs committee.
US inflation surprised financial markets with a higher than expected reading on Tuesday. Today it was the turn of the UK, but the surprise came the other way.
UK annual inflation remained at 4%, when economists were convinced that the consumer price index (CPI) would rise slightly because of higher energy bills.
The slight downside surprise prompted a move down for sterling against the US dollar, and has helped the FTSE 100 to a 0.8% gain, outpacing the rest of Europe’s benchmark indices.
However, Bailey told the committee that services inflation was not compatible with the Bank’s 2% target. The price of services rose to 6.5% in January from 6.4% in December.
You can watch Bailey’s testimony live here.
The key question is whether the Bank of England will see the milder inflation reading as support for cutting interest rates sooner rather than later. Financial markets are pricing in a 50/50 split between bank rate remaining at 5.25% by the Bank’s June monetary policy meeting and it falling to 5% – a single cut.
Market bets imply only a one-in-five chance of a rate cut in the previous meeting in May.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said:
It is a relief to see UK inflation coming in below expectations. The main downward driver came from heavy discounting of furniture and household goods, and a further slowdown in food inflation to the lowest level since April 2022 is very welcome news.
If we see more easing in services inflation together with some weakness in economic data by then, the Bank of England would be more open to and comfortable with starting to cut rates in the second half of this year.
Pushpin Singh, senior economist at the Centre for Economics and Business Research, said:
The concern for policymakers will be that services inflation ticked up again in January, driven largely by elevated wage growth rates. Because of this, Cebr expects the Bank of England to remain cautious by not cutting rates before May and only doing so gradually thereafter.
You can continue to follow our live coverage from the around the world:
In UK politics, it is the final day of campaigning in the Kingswood and Wellingborough byelections
In US politics, Democrats decry Republicans’ impeachment of homeland security secretary Alejandro Mayorkas as a ‘sham’
In our coverage of the Russia-Ukraine war, Ukrainian forces destroy a large Russian landing ship off Crimea
In our coverage of the Middle East crisis, the World Health Organization accuses Israel of impeding aid delivery in Gaza
Thanks for reading today, and please join us tomorrow for more. Next up: UK GDP. JJ
Updated
US stock markets have opened on Wednesday with fairly strong gains.
Here are the opening snaps from Wall Street, via Reuters:
S&P 500 UP 28.94 POINTS, OR 0.58 PERCENT, AT 4,982.11
NASDAQ UP 124.33 POINTS, OR 0.79 PERCENT, AT 15,779.93
DOW JONES UP 125.54 POINTS, OR 0.33 PERCENT, AT 38,398.29
If you’re intrigued by the world of “romantasy” that has helped Bloomsbury to its highest ever share price, then you are not the only one: the romance genre is doing well enough that dedicated shops are opening for it.
Bookshops focusing one genre are not new (shout-out to detective specialist No Alibis in Belfast, Northern Ireland) but romance is being propelled by Instagram, TikTok and Facebook.
At least eight other dedicated romance novel bookstores opened across the US in 2023, in cities from Wichita, Kansas, to Belfast, Maine, writes the Guardian’s Lois Beckett. At least three more have opened so far in 2024, in Florida and in Utah, with another planned in Portland, Oregon.
As a genre, romance is defined by its focus on a central love story, and by its promise of a “happily ever after” for its main characters – or at least, in more contemporary novels, a “happy for now”. Romance connoisseurs often refer to the amount of sex in the novels as a book’s “spice level”, which from ranges from quite mild to very spicy indeed.
You can read the full report here:
The FTSE 100 is up by 0.85% for the day, a 63-point gain which makes it the strongest performer in Europe. It has been helped by the milder inflation figures, which suggest that interest rates could drop sooner rather than later.
Germany’s Dax is up by 0.35%, and France’s Cac 40 is up by 0.6%.
The good mood on stock markets looks likely to pass through to Wall Street. Futures trading suggests that the benchmark S&P 500 index will gain 0.5% when it opens in 45 minutes, while the tech-focused Nasdaq is due for a 0.6% increase.
The Harry Potter publisher Bloomsbury has jumped 10% to a new record high after strong 2023 results.
Bloomsbury has lifted its annual profit forecasts after the latest novel from the fantasy author Sarah J Maas topped bestseller lists across the globe, the Guardian’s Jack Simpson writes.
The British publishing company told investors that its profits for the year would be ahead of December expectations, attributing much of this to the release of Maas’s latest book, House of Flame and Shadow.
The novel, which was released on 30 January, is the third book in Maas’s series that follows Bryce Quinlan, a half human, half fairy-like creature, in the fantasy Crescent City.
Maas’s “romantasy” books have gained mass popularity around the world, and House of Flame and Shadow became the number one bestseller in the US, UK, Australia and a number of other countries.
In the UK, it became the third-fastest-selling fantasy novel since records began, with 44,761 copies sold in its first week. The company said the new release had also driven demand for the previous 15 books written by Maas for Bloomsbury.
You can read the full report here:
Uber announces first ever $7bn share buyback
Uber has said it will launch a $7bn (£5.6bn) share buyback – its first ever – shortly after the taxi-hailing company reported a debut annual operating profit.
The company reached the operating profit landmark for 2023 after years of agggresive expansion across the world. That came with more than its fair share of controversy.
But the company has changed its approach, and is now focusing on profitability.
Prashanth Mahendra-Rajah, Uber’s chief financial officer, said:
Today’s authorization of our first-ever share repurchase programme is a vote of confidence in the company’s strong financial momentum. We will be thoughtful as it relates to the pace of our buyback, beginning with actions that partially offset stock-based compensation, and working towards a consistent reduction in share count.
(Let’s hope there aren’t any extra zeros in the press release like Uber’s rival, Lyft, earlier…)
British weapons manufacturer BAE Systems has said it has got regulatory approval to take over American company Ball Aerospace.
That opens the way for the completion of the $5.5bn (£4.4bn) cash and debt deal by the FTSE 100 company.
Ball Aerospace’s parent company, Ball Corporation, traces its roots back to making paint cans and glass jars in the 1880s in Buffalo, New York, and it now makes beer cans and aerosol bottles by the million. But it was Ball’s space business that caught BAE Systems’ eye.
The aerospace business, up for sale since June, specialises in instruments, sensors and spacecraft, including some of the most sensitive satellite technologies, as well as civilian applications such as monitoring weather patterns. Ball’s optics technologies were used on the Hubble space telescope and it built the Kepler telescope used to search for Earth-like planets.
Charles Woodburn, chief executive of BAE Systems, said:
In recent years, we’ve said that we would seek out opportunities to grow our portfolio in advanced technology areas that meet our customers’ most urgent needs, and completing the acquisition of Ball Aerospace is an example of that strategy in action.
The deal was first announced in August:
Train drivers at five rail operating companies in Great Britain have voted to back a mandate that will allow them to continue striking for the next six months.
Drivers from Chiltern Railways, c2c, East Midlands Railway and TransPennine Trains, all voted overwhelmingly in support of the mandate, which is a legal requirement for unions to continue industrial action.
There are now live mandates at the remaining eleven train operating companies that Aslef, the drivers’ union, is in dispute with.
It comes two weeks after rolling strikes by Aslef across different regions caused widespread disruption for travellers across the country, with the majority of services cancelled.
Mick Whelan, general secretary of Aslef, said:
These results show – yet again – a clear rejection by train drivers of the ridiculous offer put to us in April last year by the Rail Delivery Group on behalf of the train operating companies with whom we are in dispute.
But we remain open and willing, as ever, to talk about a revised offer. That’s why we are asking the secretary of state for transport, or the rail minister Huw Merriman, to come and meet us. Mr Harper hasn’t seen fit to talk to us since December 2022; Mr Merriman has not been in the room with us since January 2023; and the RDG has not talked to us since April last year.
Virgin Media and O2 mobile customers hit with 8.8% bills increase
Millions of consumers with Virgin Media O2 are set to hit with the biggest increase in bills in the UK telecoms market this year, after the telecoms company revealed an inflation-busting 8.8% rise.
Most of the main operators have mid-contract bill rises written into contracts that are linked to the consumer prices index (CPI) measure of inflation for December, plus an added increase of 3.9 percentage points.
Last month, BT, which also owns mobile operator EE, Vodafone and Three unveiled a 7.9% increase in customers’ bills which will kick in from around April. Sky announced an increase of 6.7%.
However, Virgin Media O2, which merged in 2021, follows the January rate of the higher retail price index (RPI) measure, plus an additional 3.9 percentage points. This means that a typical customer is facing an 8.8% increase in their bills from this Spring.
Rocio Concha, director of policy and advocacy at consumer watchdog Which?, said:
This month’s RPI announcement will confirm the worst fears of O2 and Virgin Media customers who now face the biggest broadband and mobile price hikes by any major provider this April. This comes on top of a more than 17% increase last year. That’s a huge overall increase that most people would not have anticipated when they first took out their broadband or phone deal.”
Last year, it was only O2 customers who faced a steeper rise, but now Virgin Media has joined its merger partner in following the higher RPI measure of bill increases.
Virgin Media O2 points out that for mobile customers the rise does not affect their entire bill, which includes payments to own a mobile phone, and will only apply to the cost of their airtime contracts, or what customers pay for calls, texts and data.
The company said that this makes the effective price increase for mobile customers 5% this year, while for Virgin Media customers the rise will equate to an average £4.16 per month, “around the cost of a takeaway coffee”.
A spokesman for Virgin Media O2 said:
We are investing heavily to ensure we continue to provide the fast and reliable connectivity our customers rely on, and the amount we receive from price increases is greatly outweighed by the £5m we invest every single day to upgrade our networks and services to give customers a better overall experience. It’s clear that we continue to offer excellent value, with customers paying less and receiving more.”
In December, Ofcom proposed banning index-linked rises, saying they were too confusing for consumers.
Last month, BT become the first big telecoms company to scrap the inflation-linked price rises for mobile and broadband customers, although not before pushing through a final increase this year.
The official housing data from the Office for National Statistics is behind measures from lenders Nationwide and Halifax. So we have a good sense that the broader ONS measure is likely to recover in the coming months.
On a seasonally adjusted basis, the average UK house price increased by 0.3% in December 2023, following a month-on-month decrease of 0.7% in November 2023.
Nevertheless, some economists believe prices may have a bit further to decline. They are down by 2.4% below the September 2022 record.
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said
We continue to expect a 5% peak-to-trough fall, though the risks appear to be skewed towards a smaller decline. Further ahead, we expect the official measure to follow the Nationwide measure and start to rebound, as the fall in mortgage rates and recovery in real incomes boosts affordability.
Barret Kupelian, chief economist at PwC UK, an accountancy firm, said:
House prices grew marginally on a seasonally adjusted basis in the last month of 2023 and private rental inflation has stabilised. This could be the first in a series of steps leading up to a return to some semblance of normality in the residential property market.
In the short term, leading indicators suggest that downward pressure on house prices continue to ease, with London leading the trend […] With supply of housing subdued and demand returning, house prices growth is therefore likely to pick up pace in the next few months.
UK house prices drop 1.4% in year to December
For house buyers, rather than renters, prices fell – but at a slower rate than before.
UK house prices fell by 1.4% in the year to December, according to the Office for National Statistics. That was a slower decline than the 2.3% in the year to November.
The average UK house price was £285,000 in December 2023, which was £4,000 lower than 12 months previous.
UK rental prices rose by 6.2% in the year to January, remaining at the fastest rate of growth since the measure was introduced in 2016.
The Office for National Statistics said:
Annual private rental prices increased by 6.1% in England, 7.0% in Wales and 6.8% in Scotland in the 12 months to January 2024.
Within England, London had the highest annual percentage change in private rental prices in the 12 months to January 2024, at 6.9%, while the North East saw the lowest, at 4.7%.
The biggest surprise in today’s European data is not on GDP: it is the 2.6% jump in industrial production across the eurozone.
It was Ireland that drove that increase – industrial production was up by 44%.
But when it comes to Irish economic data, sometimes a bit of caution is required. Ireland’s economy has a lot of foreign money flowing through it without leaving much of a mark in the real world. This is a slightly different issue, but a similar one.
Bert Colijn, senior economist at ING Bank, said that he reckons the truer figure is probably about 0.3%:
Eurozone industrial production experienced an Ireland driven jump in December, this should be interpreted with caution given Irish volatility thanks to the big share of contract manufacturing and outsourcing in Irish production. pic.twitter.com/R3d2T5IMDK
— Bert Colijn (@BertColijn) February 14, 2024
Excluding Ireland we estimate that production grew by 0.3% in the eurozone, still defying continued German weakness where production declined by -1.2% in December. But while that is an encouraging note at the end of 2023, the overall trend for the eurozone excl Ireland was down. pic.twitter.com/NvwwIp4SsC
— Bert Colijn (@BertColijn) February 14, 2024
Joshua Mahony, chief market analyst at Scope Markets, a trading platform, said:
With industrial production enjoying a 2.6% jump in December (best since mid-2022), we are seeing some signs that the region is starting to pick up after what has been a particularly tough few years for manufacturers.
Germany’s economy – the largest in Europe – contracted by 0.3% in the final quarter of 2023.
But the overall bloc was held up by Spain, whose economy grew by 0.6% in the quarter. Its neighbouring economy, Portugal, rose by 0.8%.
But there was good news in the employment figures. Euro area employment rose by 1.3% year-on-year in the final quarter. That was above the 1.1% expected by economists.
Eurozone GDP unchanged at 0%, meaning bloc avoided recession
The latest eurozone GDP figures have confirmed that the bloc narrowly avoided a recession in the final three months of 2023 – while employment increased more than expected and industry surprised economists with strong growth in output.
Statistics office Eurostat confirmed that GDP grew 0% in the final quarter of 2023, in line with the preliminary reading. Output had declined by 0.1% in the previous quarter – and that reading was also confirmed.
Two quarters of consecutive declines in output are usually counted as a technical recession. In this case the bloc has avoided that fate – although its economy is still struggling.
Here’s a story from last night to make you pause before you next press “send” (or, indeed, publish a blog post)…
US taxi-hailing app Lyft shares surged – then just as rapidly slumped – after a typo in a press release said that its margins were going to expand by “500 basis points” (or five percentage points). That was when they realised their error: it should have read “50 basis points”.
The Uber rival’s shares soared by more than 60% in after-hours trading, only to fall back once the company corrected the fat finger figure.
But investors were still fairly happy: the share are still up by 17% in pre-market trading, ahead of Wednesday’s opening bell on Wall Street. Rides to stadiums grew more than 35% last year from 2022, mainly driven by Taylor Swift’s Eras tour, Beyoncé’s Renaissance world tour and sporting events, Lyft said.
Sony cuts forecasts for PlayStation 5 sales
Sony has cut its forecasts for sales of the PlayStation 5 in the year to the end of March, Reuters reports.
The Japanese company said it will sell 21m of the consoles, down from 25m previously, after sales during the end-of-year holiday season disappointed despite big spending on promotions to attract buyers.
The company will also list its financial business in October 2025 as the conglomerate focuses on the businesses where it is strongest: entertainment and image sensors.
Bloomberg News reports that Naomi Matsuoka, Sony’s senior vice president, said:
Looking ahead, PS5 will enter the latter stage of its life cycle. As such, we will put more emphasis on the balance between profitability and sales. For this reason, we expect the annual sales pace of PS5 hardware will start falling from the next fiscal year.
Bloomberg also has this interesting nugget on Sony’s development of games:
The disappointing hardware sales came despite a strong quarter for software. Released in October as a PS5 exclusive, Marvel’s Spider-Man 2 sold 2.5m copies in its first 24 hours, making it the fastest-selling debut from Sony’s in-house studios.
Across Europe stock markets are all up today (after some dipped at the open) although the FTSE 100 is the leader.
Germany’s Dax is up by 0.1%, while France’s Cac 40 has gained 0.3%.
One of the most prominent movers is Heineken, which is down 4.8% after warning that profits could fall below estimates. The Dutch beer maker blamed geopolitical and economic volatility.
Heineken chief executive Dolf van den Brink said:
We remain cautious about the global economic and geopolitical outlook.
Reuters reports:
Beer brewers raised prices significantly throughout 2023 to offset steep increases in costs, hurting volumes.
Heineken’s volumes fell by 4.7% organically in 2023, with more than 60% of that driven by declines in Vietnam and Nigeria, where economic and political conditions hurt sales.
European Central Bank needs more time before cutting interest rates
While the Bank of England may be on track for rate cuts in the next few months, across the Channel (well, ok, in Frankfurt) the European Central Bank still needs more time.
That’s according to Luis de Guindos, the ECB’s vice-president (and number two to the boss, president Christine Lagarde). In a speech this morning in Split, Croatia, he said it was too early to cut interest rates for the euro area.
The ECB will keep rates “at sufficiently restrictive levels for as long as necessary”.
He said:
While inflation is on the right track, we need to keep a close eye on the risk factors at play. On the upside, wage pressures remain high and we do not yet have sufficient data to confirm they are starting to ease. Profit margins could also prove more resilient than anticipated. Heightened geopolitical tensions, especially in the Middle East, could raise energy prices and disrupt global trade.
While we are heading in the right direction, we must not get ahead of ourselves. It will take some more time before we have the necessary information to confirm that inflation is sustainably returning to our two per cent target.
Updated
Inflation remains a problem for every household, despite recent falls that have more than halved the consumer prices index since a peak in 2022.
The latest figures for January show gas and electricity bills were pushed higher by Great Britain’s regulator, Ofgem, lifting the prices cap by 5%, while restaurants and hotel charges jumped 7% year on year.
Worse is the price of electricity, gas, and other fuels. Inflation for this category has fallen by 18% since its peak in January 2023. However, prices last month were 89% higher than they were in January 2021.
These are dramatic increases in the cost of living. So it is no wonder the boss of the TUC, Paul Nowak, is hopping mad about any talk of lower inflation somehow meaning the problem has gone away for most people.
You can read the full analysis here:
The National Institute of Economic and Social Research (Niesr) expects inflation to fall further during 2024 – but it added that there is a hint of some inflationary pressure out there.
In particular, Paula Bejarano Carbo, a Niesr economist, highlighted inflation in the price of services rising to 6.5% from 6.4% in December. (The Bank of England keeps a close eye on services inflation because it is a handy insight into the UK specifically, rather than international factors.)
Given our forecast that #inflation is set to fall throughout the remainder of the first half of 2024 due to base effects, today’s downward surprise may signal that inflation is set to fall even faster than we projected.
— National Institute of Economic and Social Research (@NIESRorg) February 14, 2024
However, this is unclear given today’s core inflation…
Nobody appears to be dissenting that UK inflation and interest rates are both headed downwards in the coming months.
Simon French, chief economist at Panmure Gordon, an investment bank, has not seen anything from the latest data to go against that:
UK CPI inflation level at 4.0% YoY in January. Unchanged on Dec. Always the hardest month to draw insight from given basket rotation/retailer discounting. Message is that inflation is down by almost 2/3rds from peak - & will come down further over the next couple of quarters.
— Simon French (@shjfrench) February 14, 2024
Indeed, the “softening” of core inflation is the most important number from January’s inflation figures, he argues.
Most important data point from first glance of UK inflation data - seasonally adjusted core CPI softer in January (+0.1% MoM) after an upside blip in December. Continues softening trend - but April remains key for a potential uptick. https://t.co/1Hpp8h2dAc pic.twitter.com/xHsZgRs8qM
— Simon French (@shjfrench) February 14, 2024
Julian Jessop, an economist affiliated with the Institue of Economic Affairs, a right-wing thinktank, said that retail discounts in homeware and furniture shops may have been at play:
#Inflation held down by a further fall in #food price inflation and weakness in 'furniture and household goods' and 'clothing and footwear' - consistent with the idea that December's slump in #retail sales has prompted some heavier discounting... pic.twitter.com/OFFAQYNwsF
— Julian Jessop (@julianHjessop) February 14, 2024
Lydia Prieg, head of economics at the New Economics Foundation, a left-wing thinktank, said the Bank of England should switch its focus from fighting inflation to fighting to support the UK economy.
No change in inflation between Jan & Dec despite the energy price cap going up. Bank of England expects inflation to return to 2% target by May. A potential recession is now a greater threat than inflation, and the Bank of England should cut rates sooner rather than later [1/4]
— Lydia Prieg (@LydiaPrieg) February 14, 2024
It looks like the prospect of lower interest rates has helped UK housebuilder stocks, as demand for new housing is helped by cheaper borrowing costs.
Persimmon is the second-biggest riser on the FTSE 100, up 3%, while Taylor Wimpey has gained 1.9%.
Let’s take a look at what financial markets are saying on the prospects for UK interest rates.
The below table shows the likelihood of interest rate moves at each meeting of the Bank of England’s monetary policy committee – according to the bets of financial traders. It shows that in May traders think there is a one-in-four chance of a rate cut.
However, in June that rises to a 55.7% chance of a rate cut. And by December markets are pricing in almost three rate cuts.
If the Bank goes through with three cuts that would leave interest rates at 4.5% by the end of the year, down from 5.25% now.
Mild UK inflation supports interest rate cuts in May, say economists
UK inflation has remained unchanged at 4%, surprising economists who had predicted a small increase to 4.2%.
The figures showed the first monthly fall in food prices for more than two years. Food and non-alcoholic drink prices fell at a monthly rate of 0.4% in January, the first monthly decline since May 2021, driven by price cuts in January for bread and cereals, cream crackers, sponge cake and chocolate biscuits. Furniture and household goods prices also fell.
That offset the rise in gas and electricity costs after the Great British energy regulator raised its price cap.
You can read our full report here:
The lower-than-expected figure gives some relief to the Bank of England, which is expected to start a cycle of interest rate cuts in the coming months. It suggests that inflation is on a downward trajectory.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a consultancy, said:
Looking ahead, it remains likely that the headline rate of CPI inflation will fall back to about 2.0% in April and then modestly undershoot the 2% target over the following six months.
He cites some key factors ahead for the UK. Great Britain’s energy regulator Ofgem is expected to cut the energy price cap by about 15% in April. The government will probably freeze fuel duty, as it has done for a decade. And food price inflation is expected to remain low as well.
Tombs expects this to persuade the Bank of England’s rate-setting monetary policy committee (MPC) that interest rates can fall in the coming months:
We continue to think that CPI outturns over the coming months will convince the MPC in the second quarter that monetary policy does not need to be quite as “restrictive” as it is currently, though it looks like a toss-up whether the committee will opt to cut bank rate for the first time in May or June.
Martin Beck, chief economic advisor to the EY Item Club, an economic forecaster, said:
The EY Item Club continues to think that CPI inflation should fall to, and perhaps even below, the Bank of England’s 2% target over the next few months. Lower wholesale gas prices mean energy bills are on course to fall by around 15% in April when the Ofgem cap, which governs the typical household energy bill, is recalculated. And if the most recent decline in gas prices (which are now well below levels just prior to Russia’s invasion of Ukraine) is maintained, another double-digit percentage fall in bills could be on the cards for July.
Disruption to shipping due to geopolitical tensions presents a potential risk to inflation’s descent. But with shipping costs only a tiny part of the price consumers pay for goods, that inflationary risk looks modest at present. Overall, the latest inflation data should reassure the MPC that the time to start cutting interest rates is approaching. The EY Item Club continues to expect the first cut in bank rate in May.
The FTSE 100 has opened up 0.5%, possibly helped by a weaker pound after the inflation data.
London’s blue-chip index has also been helped by strong figures from Coca-Cola Hellenic Bottling Company, a distributor of the soft drink which is up 5% in the opening trades.
Across Europe it has been a less rousing start to the trading day. Here are the opening snap reports on stock markets, via Reuters:
EUROPE’S STOXX 600 FLAT
FRANCE’S CAC 40 DOWN 0.2%, SPAIN’S IBEX UP 0.2%
EURO STOXX INDEX DOWN 0.1%
EURO ZONE BLUE CHIPS DOWN 0.2%
GERMANY’S DA FLAT
Updated
The weaker pound appears to be helping prospects for the FTSE 100 companies, which make the bulk of their earnings in other currencies.
FTSE 100 futures suggest the index will gain 0.5% when they open in about 15 minutes’ time.
The Bank of England is gearing up to cut interest rates. That would generally be expected to push up inflation, so Bank governor Andrew Bailey would be in a tricky position if headline inflation were rising.
As it is, financial markets are looking more comfortable with the idea that several cuts in the main lending rate, bank rate, are on the way.
UK interest rate futures show that markets have increased their bets on rate cuts during 2024. They imply that rates will fall by 0.71 percentage points during 2024, up from 0.58% before the data, according to Reuters.
Bank rate is at 5.25%, so that would suggest nearly three interest rate cuts during 2024 (assuming each cut is 0.25 percentage points).
This is a relief to the government and Bank of England
— Lizzy Burden (@lizzzburden) February 14, 2024
Core inflation was lower than thought, services inflation edged up less than expected, and monthly price growth was -0.6%, double the forecast drop
£ at a 1-week low - traders were braced for a nasty shock after US CPI
Jeremy Hunt may not be the only person feeling somewhat relieved this morning: for the Bank of England it will likely forestall criticisms of its monetary policy stance.
The reaction on financial markets suggests that may be the case: sterling has dipped by 0.14% against the US dollar and 0.2% against the euro. That move usually suggests a bet on lower rates (which are less attractive for investors able to move their money all over the world in search of better returns).
Here is the graph showing the move in sterling as the lower-than-expected inflation reading came in:
The political reaction to the inflation reading has started.
Here is what chancellor Jeremy Hunt had to say:
Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months.
Rachel Reeves, Labour’s shadow chancellor, said:
After 14 years of economic failure working people are worse off. Prices are still rising in the shops, with the average households’ costs up £110 a week compared to before the last election. Inflation is still higher than the Bank of England’s target and millions of families are struggling with the cost of living.
The Conservatives cannot fix the economy because they are the reason it is broken. It’s time for change. Only Labour has a long-term plan to get Britain’s future back by delivering more jobs, more investment and cheaper bills.
We usually quote inflation as an annual number, but the monthly reading also suggests the downward trajectory: on a monthly basis, the consumer price index (CPI) fell by 0.6% in January.
The core measure of CPI also remained unchanged in January, at 5.1% annually. And that was lower than the 5.2% expected by economists. The core measure ignores volatile energy, food, alcohol and tobacco to try to get a more accurate picture of underlying inflationary pressures.
The headline inflation reading supports the interpretation (see opening post) that price pressures are easing in the UK.
Here is the ONS’s graph showing that trajectory, starting in 2014. Inflation spiked in 2022 after Russia’s full-scale invasion rocked global energy markets, before falling back as those increases faded.
Rising energy prices – after Great Britain’s energy regulator raised the price cap – were the main reason that inflation stayed at 4%, according to the UK’s Office for National Statistics (ONS).
But it was furniture and household goods that prevented the expected increase.
It said:
The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.
Updated
UK inflation stays flat at 4% in January
Newsflash: The UK’s consumer price index (CPI) inflation has stayed flat at 4% in January – unchanged from December.
Economists had expected a small increase to 4.2%, so this is a softer reading than expected.
UK inflation expected to rise, say economists
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
UK inflation has fallen sharply in the last year as the global energy market has calmed down following the chaos caused by Russia’s full-scale invasion of Ukraine. But inflation may well have ticked upwards in January: we will find out whether that was indeed the case at 7am UK time.
Economists are forecasting a small increase in the UK’s consumer price index (CPI) in January. A poll by Reuters of economists suggests that inflation will rise from 4% in December to 4.2%.
That would be a second consecutive monthly increase, although still well down from its 41-year high of 11.1% in October 2022. The below chart shows the data for the last five years up to December.
Sanjay Raja, senior economist at Deutsche Bank, said:
After headline inflation surprised to the upside in December, we expect a further – albeit marginal – jump in inflationary pressure.
However, Raja warns against getting too excited if inflation does rise as expected. The rate will be “lifted in large part by positive base effects”, meaning that the index was temporarily lower last year than would otherwise be expected. That has partly been caused by increases in January to the government’s energy price cap And factory prices tracked by the producer prices index (PPI) are also softening, which should eventually be passed through to slowing inflation for consumers.
Raja said:
Looking ahead, we continue to see disinflationary pressures build, consistent with slowing survey and PPI data. We see CPI slowing below 2% year-on-year in [the second quarter of 2024], before edging a little above 2% through [the second half of 2024].
Looking ahead, we also have the second estimate for eurozone GDP. The first reading showed 0% growth. That’s hardly something to write home about, but it took economists by surprise, and meant that the bloc avoided a technical recession.
We will be on the lookout for any downward revisions for the fourth quarter, which would mean that the eurozone was, in fact, in a technical recession. Downward revision or not, it would hardly change the situation: Europe’s economy is stuttering as Germany struggles.
The agenda
7am GMT: UK consumer price index inflation (January; previous: 4% annual; consensus: 4.2%)
10am GMT: Eurozone GDP growth rate (fourth quarter of 2023; prev.: 0.1% quarter-on-quarter; cons.: 0%)
10am GMT: Eurozone industrial production (December; prev.: -6.8% year-on-year; cons.: -4.1%)
