Closing summary: Sterling slumps 1.4% against US dollar
The value of sterling has slumped against the US dollar after a combination of slower UK inflation and stronger US retail sales suggested a monetary policy gap might open up between the countries.
The pound has dropped by 1.4% to about $1.2000 against the US dollar in afternoon trading in London.
Weaker inflation reduces the case for further rate hikes in the UK, and vice versa for the strong US retail data. Higher relative interest rates in the US push up the value of its currency.
The US data “points to solid underlying momentum in consumer spending and is consistent with the strength of the labor market at the turn of the year,” said Mickey Levy, an economist at Berenberg.
In the UK, it may be time for a pause for the Bank of England, said Sanjay Raja of Deutsche Bank.
With regards to monetary policy, we still see a case for one more hike (0.25 percentage points) before the MPC opt more explicitly for a ‘conditional pause’. That said, slowing momentum in both the wage and inflation data will likely make next month’s rate decision more finely balanced than markets expect.
In other developments from today:
Morrisons’ credit rating has been downgraded after the supermarket reported poor sales and profits in the latest blow for the UK’s fifth-largest supermarket.
Glencore will give almost £6bn to shareholders after the mining and commodities company reported record pre-tax profits of more than £28bn in 2022, boosted by rocketing oil and coal prices.
Barclays staff will share £1.2bn in bonuses this year despite a 15% drop in the bank’s annual profits after it was hit by the costs of a US trading blunder and more money being put aside for a potential jump in defaults by borrowers.
Administrators have failed to find a buyer for collapsed regional airline Flybe, so its assets will be sold off.
UK house price inflation eased in December to annual growth of 9.8%, according to official figures.
You can continue to follow our live coverage from around the world:
In our UK politics coverage, Nicola Sturgeon denies ‘short-term pressures’ were behind her resignation as Scottish first minister
In our coverage of the Russian invasion of Ukraine, Luhansk’s governor denies Russian claims of breakthrough in the region
In the US, Biden seeks to turn voters against Republicans by casting them as spendthrifts
Thank you for following our live business coverage. Please do join us tomorrow for more of the same. JJ
British oil and gas producer Capricorn Energy has abandoned an attempt
to merge with Israeli gas group NewMed Energy, weeks after its top
brass resigned simultaneously.
Capricorn said on Wednesday that it had pulled the plug on the
proposals, which had been opposed by activist investor Palliser
Capital and some of the company’s biggest shareholders.
London-listed Capricorn’s chief executive and most of the board
suddenly quit last month, to be replaced by directors put forward by
Palliser.
The company, formerly known as Cairn Energy, said then it would kick
off a strategic review. Today it said that, following the review, it
has “mutually agreed that the business combination agreement” between
it and NewMed be terminated.
The collapse of the deal represents Capricorn’s second pulled merger
in less than a year after the proposed $1.4bn tie-up with rival Tullow
Oil – which also faced investor opposition - was ditched in September
to pursue the NewMed deal.
It looks like that strong US retail data has indeed put the fear of Fed into investors: Wall Street’s major stock indices are down in early trading.
A reminder of the topsy-turvy logic: strong retail sales growth suggests the US economy is doing better than expected. That would usually be seen as a good thing for US companies, but in this case it is likely to make Federal Reserve policymakers think further rate hikes are needed to prevent inflation building further.
Here are the opening snaps from the Street:
S&P 500 DOWN 24.49 POINTS, OR 0.59%, AT 4,111.64
NASDAQ DOWN 57.09 POINTS, OR 0.48%, AT 11,903.06
DOW JONES DOWN 200.69 POINTS, OR 0.59%, AT 33,888.58
Flybe assets to be sold off after search for buyer fails
The drawn-out collapse of regional British airline Flybe appears to have reached an end point, after administrators said they would be unable to find a buyer.
Flybe entered administration at the early stages of the pandemic in 2020, but it was relaunched a year ago after being bought by Cyrus Capital, an investor.
However, the airline once again collapsed in January, with 277 staff immediately made redundant and all flights cancelled. 44 staff stayed on, but 25 of those were made redundant on Wednesday, leaving only a skeleton staff to help with the sale of the assets that remain.
Flybe’s administrators, Interpath Advisory, said it had “significant interest from a number of credible parties” for a purchase, but “it has not been possible to develop a transaction in the available timeframe”. The administrators will now look at selling off “specific rights, interests and assets”.
David Pike, managing director at Interpath, said:
Unfortunately, there was a challenging set of circumstances at play, including the ‘use-it-or-lose-it’ rules related to slots, complexities with European recognition of a potential temporary operating licence and the high costs associated with preserving the company’s operating platform, which meant there was a limited window in which a clear path forward could be set.
Furthermore, it was clear from the outset that there was only a limited number of parties who had the necessary strategic fit and who could navigate the complexities of such a transaction to get a deal over the line.
The administrators will return Flybe’s aircraft records to lessors. Rival airline Ryanair has already moved to snap up ex-Flybe staff.
Updated
Indian billionaire Gautam Adani’s fightback against a US short seller will continue tomorrow, with senior executives from his Adani Group empire due to talk to bond investors.
Adani Group and two of its main subsidiaries will hold calls with bond investors on 16 and 21 February, according to Reuters, to give an update on a situation that has gripped the Indian business world.
Short seller Hindenburg Research in January accused Adani of the “largest con in corporate history”, using offshore vehicles and debt to inflate the value of its shares. Adani has strenuously denied the allegations.
However, those denials, including a detailed attempt at a rebuttal of the allegations, have not stopped a share price slide amid severe scrutiny. Gautuam Adani’s net worth has dropped by $69bn this year because of his enormous holdings, according to the Bloomberg billionaires index. Here is the Guardian’s Jonathan Barrett yesterday on the latest troubles facing the group:
The beleaguered conglomerate Adani Group is facing an investigation by Indian regulators into fraud allegations made by the US investor Hindenburg Research, as a brief reprieve in pressure on its shares gives way to more selling.
The stock market rout has wiped more than US$125bn from the shares of Adani’s listed companies, representing well over half its total value, in the three weeks since it was accused of being laden with debt and engaging in a “brazen stock manipulation and accounting fraud scheme”.
US retail sales surge past forecasts in January
US retail sales have surged past economists’ expectations: they grew by 3% in January, much faster than the 1.8% average growth forecast.
Sales in the world’s largest economy during the month were an enormous $697bn (£574bn), the US Commerce Department said on Wednesday.
The figures will give economists much to chew over. The US economy is at a tricky stage for investors, who are trying to work out how much further the Federal Reserve will raise interest rates. Weak December retail numbers suggested fewer hikes may be in order, but stronger data might add weight to the hawks who would raise rates quicker and higher to fight inflationary pressures.
Lou Crandall, chief economist at Wrightson ICAP, said:
The bottom line is that the underlying trend in consumption is not as weak as the December numbers indicated, but is also not as strong as the January numbers might suggest.
The Federal Reserve has, like other central banks, insisted that it is willing to do what it needs to in order to extinguish inflation. The movements of the world’s most powerful central bank are being watched particularly closely, given how close many major economies are to recession.
Here’s Reuters’ report on the latest comments last night from Fed officials:
Federal Reserve officials said on Tuesday the US central bank will need to keep gradually raising interest rates to beat inflation and suggested sticky price pressures driven by a hot jobs market may push borrowing costs higher than they once thought.
“With the strength in the labor market, clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher” than current forecasts hold, New York Fed President John Williams told reporters in New York.
UK stocks trading slightly higher
Let’s take a look at how the FTSE 100 is performing this lunchtime. It’s edging higher is currently just 0.10% up on the day.
Among the biggest risers are British luxury goods firm Burberry, up almost 3%, followed by gambling firm Entain, the owner of Ladbrokes and Coral, which is 2.9% higher.
Meanwhile, Barclays remains the biggest faller – down 9% – after it announced a 15% fall in annual profits, as it unveiled a £1.2bn bonus pot for its bankers.
It also led other banks lower, including Lloyds Banking Group – down 3.5% – and NatWest Group – down 2.4%.
Turkish stock exchange jumps after reopening following earthquake
Borsa Istanbul rose by almost 10% on Wednesday, as it reopened after five days of closures related to the earthquake and previous steep falls. The earthquakes which struck Turkey and neighbouring Syria on 6 February killed more than 40,000.
Istanbul’s stock market climb has been viewed by some as a sign that government measures to support equities are working, however sentiment has remained fragile and the lira hit a record low on Wednesday.
Turkey’s lira hit a new record low of 18.9010 to the dollar on Wednesday, before regaining some of its losses. The currency has weakened by about 1% since the start of the year.
Authorities in Turkey made a number of interventions earlier this week to shore up equity markets before their reopening, following sharp stock market falls in the two days following the quakes.
Stuart Cole, head macro economist at Equiti Capital said:
Turkish stocks have benefitted from the intervention in the market we have seen from the government there, all designed to prevent a crash following the closure.
He added: “I would also question how long the authorities can continue this support given the fragile nature of official finances.”
Morrisons’ credit rating downgraded after report of poor sales and profit
Morrisons’ credit rating has been downgraded after the supermarket reported poor sales and profits in the latest blow for the UK’s fifth-largest supermarket.
Moody’s, the credit rating agency, said the outlook for Morrisons’ ability to repay its £7.5bn of debts had shifted to negative from stable and its existing junk rating knocked down one notch, from B1 to B2, indicating higher risk.
Citing an “aggressive financial strategy, high leverage” and private equity ownership as factors in the downgrade, analysts flagged concerns about “operating underperformance”, saying Morrisons was suffering from lower sales combined with higher costs for energy, wages and transport.
The downgrade was triggered by lower than expected profits for 2022, as revealed in figures published by Morrisons last month, which meant the retailer’s debts now stand at 9.1 times underlying profits against the credit rating agency’s expectation of 6.5 times.
Moody’s said the outlook was negative as Morrisons’ debt to profits ratio put it close to a further downgrade. However, the report added that the supermarket’s sales had risen ahead of Christmas and its market share had stabilised, according to data from the market research firm Kantar, suggesting profits could improve in 2023.
You can read the rest of the story by our retail correspondent, Sarah Butler, here:
Frankfurt airport closed to arriving flights amid Lufthansa IT systems failure
Frankfurt airport in Germany – one of Europe’s busiest – has said this morning it will cancel or divert all incoming flights, following a IT system failure at the airline Lufthansa.
The German carrier Lufthansa was forced to cancel dozens of flights today because of the IT failure.
As a result, Lufthansa planes have been unable to depart from Frankfurt and are parked up there.
That means no parking positions are available for other aircraft, according to German air traffic control.
Lufthansa has said it expects its flight operations to stabilise in early evening today.
“Likely haven’t seen the end of house price falls”
Housing market analysts are sharing their views on the latest house price index from the Office for National Statistics, and while some are more sanguine than others, the general consensus is that house prices are likely to continue to slide in coming months.
“Annual price falls are almost inevitable in the coming months but demand and supply have recovered strongly since Christmas, which means a double-digit price crash this year feels unlikely,” said Tom Bill, head of UK residential research at estate agent Knight Frank.
“Mortgage rates are still high compared to where they were a year ago but, crucially, have stabilised and are inching down.”
Meanwhile, Frances McDonald, a research analyst at estate agent Savills, believes “we likely haven’t seen the end of house price falls”, partly because borrowers are still facing a considerable increase in their mortgage costs, even as mortgage rates have stabilised.
“But borrowers still face a considerable increase in their mortgage costs, whether new entrants to the market or those coming off of a fixed rate deal, which means we likely haven’t seen the end of house price falls.
“The fall in the cost of fixed-rate mortgage debt is likely a reflection of lenders trying to capture a greater share of a smaller mortgage market, but there is also an increasing expectation that inflation has peaked and that Bank base rate is likely to start coming down in 2024,” she said.
“Borrowers still face a considerable increase in their mortgage costs, whether new entrants to the market or those coming off of a fixed rate deal.”
House price growth has only slowed modestly, according to Myron Jobson, senior personal finance analyst at interactive investor.
“Growth is still high – remaining in double digits in some regions. But house prices aren’t the only key determinant for home buyers and sellers. Personal circumstances might require you to buy a home,” he said.
“But if you can’t make the numbers work, rather than stretching too much now, it might be more financially prudent to wait until you are a bit more comfortable financially to buy.”
Updated
UK house price growth cooled in December, according to official figures
House prices in the UK rose by 9.8% year-on-year in December 2022, compared with the same month in 2021, according to figures just out from the Office for National Statistics’ house price index.
This was lower than the revised 10.6% growth figure seen in November.
The average price of a home in the UK was £294,000 in December, the ONS found. That’s £26,000 higher than 12 months earlier, but slightly below the record high of £296,000 recorded in November. It’s the first time in more than a year that official data has showed a slide in house prices.
Like several other housing market surveys – including those from lenders Halifax and Nationwide – this seems to show a slowdown in house prices, which had soared since the market was reopened after being frozen during the first few months of the pandemic.
Rising interest rates and higher mortgage borrowing costs, combined with the cost of living crisis and the economic outlook, all appear to have started to cool the market.
The ONS data comes after figures from the Bank of England released a few weeks ago showed that demand for mortgages tumbled to its lowest level since the 2020 Covid lockdown in December, as the number of home loan approvals dropped.
However, mortgage rates have fallen slightly in recent weeks, despite the Bank of England’s most recent interest rate rise at the start of the month.
A couple of lenders – HSBC and Virgin Money – have also put sub 4% five-year fixed mortgage rates back on the market in recent days for the first time since the autumn, when mortgage rates shot up in the wake of Liz Truss and Kwasi Kwarteng’s disastrous mini budget.
Updated
Sizewell nuclear reactor taken off-grid for planned maintenance
Sizewell B in Suffolk – the last nuclear reactor to have been opened in the UK – went offline on Wednesday morning, according to National Grid data, for planned maintenance and refuelling.
The power plant is expected to be offline for 66 days, and extra workers have arrived at the site to help complete 10,000 routine maintenance tasks. About a third of the fuel set is also due to be replaced during this time.
Sizewell, owned by the French state energy giant EDF, supplies power to about 2.5m homes across East Anglia but energy will be sourced from other British power stations during the outage.
The company said work had begun earlier this week to chop down trees and clear land for the access road for the planned new nuclear reactor Sizewell C.
The outage comes as energy prices remain at the forefront of many consumers’ minds given this morning’s inflation figures.
The surge in energy prices sparked by the war in Ukraine, and one of the main contributors to stubbornly high inflation, has prompted fresh calls this morning from business groups for the government to invest in the UK’s energy system.
Some analysts say that boosting green investment could help insulate the UK from future volatility in global energy markets.
Updated
Barclays shares drop 8% after profits fall
The FTSE 100 has recovered somewhat from its earlier dip, and is almost flat for the day, but there is one big loser: Barclays (albeit not its top-earning employees).
The bank reported a drop in profits – not helped by a massive trading blunder – and also disappointed investors with a new share buyback. Shares are down by 8.5% in the first hour of trading on Monday morning.
The Guardian’s banking correspondent, Kalyeena Makortoff, reports:
Barclays staff will share £1.2bn in bonuses despite a 15% drop in the bank’s annual profits, having been hit by the costs of a US trading blunder and more money being put aside for a potential jump in defaults by borrowers.
The bank revealed in its annual report on Wednesday that its staff bonus pool would go relatively untouched, with its top performers to share £1.2bn between themselves for their work in 2022. That is down only 3% compared with last year. Including deferred bonuses, the pool was down 8% at £1.8bn.
It follows a near 15% drop in pre-tax profits to £7bn for the whole of 2022. That is compared with £8.2bn a year earlier, and is lower than analyst expectations of £7.2bn.
Joseph Dickerson, an equity analyst at Jefferies, an investment bank, said Barclays’ results were “weaker than expected” because of its corporate and investment bank, which deals with businesses.
And a £500m share buyback announced by the bank “is not good enough in our view” given its healthy capital ratio, he said. Dickerson had been expecting as much as £1bn, while other analysts were at an average of £675m.
We will not know the official data on wage growth until next month, but one thing is clear: the UK’s average living standards are likely to continue to decline for the next few months.
UK average weekly total pay grew by 5.9% year-on-year in three months ending in December, according to the Office for National Statistics. When adjusted for 10.5% inflation over the same time period, that means that British workers were able to buy nearly 5% less with their wages.
That means that political pressure is likely to remain on the government for months yet – particularly as many workers mount strike action for higher pay. Those include a wave of public-sector strikes.
Paul Nowak, general secretary of the Trades Union Congress (TUC), the UK’s leading union body, said:
With inflation still at more than 10%, working people are feeling the squeeze. Real wages fell faster last year than they have in decades – worse even that during the financial crisis.
That’s why working people are desperate for a government with a plan to get pay rising. But instead, we have a prime minister determined to hold down pay and refusing negotiate.
Whatever Sunak thinks his plan is, it has failed. The Tory pay squeeze has sucked the life out of our economy and left us on the brink of recession. We need a reset at the budget – a plan to get wages rising across the economy, and funding for public sector pay.
The Confederation of British Industry (CBI), the UK’s largest business lobby group, said “the tide is turning” on inflation, but warned of more to come.
Alpesh Paleja, the CBI’s lead economist, said:
Another fall in inflation over January suggests that the tide is turning on price pressures. But with inflation and pipeline cost pressures set to remain high this year, households and businesses are likely to feel the pain for a while yet. In particular, the continued strength in more domestic measures of inflation will keep alarm bells ringing at the Bank of England.
Given the central role played by energy prices in driving inflation up over the past year, the government must use the upcoming budget to deliver a homegrown, secure, low-cost and low-carbon energy system. Measures that boost green investment will not only help reduce exposure to volatility in global energy prices, but also deliver a sustainable path to reaching net zero.
UK inflation fell for a third consecutive month in January, although in double digits it remained at among the highest levels in 40 years amid the cost of living crisis.
The latest prices data comes as the Bank of England considers a further rise in interest rates to tackle inflation at the highest levels since the early 1980s, in a move adding to pressure on borrowers after 10 successive rate rises in the past 18 months.
Rishi Sunak has also promised to halve the annual inflation rate this year as the cornerstone of his economic plans. Most economists expect inflation to fall back over the coming months amid a drop in global energy prices, and as the initial surge in markets after Russia’s invasion of Ukraine drops out of the annual inflation rate.
The chancellor, Jeremy Hunt, said:
While any fall in inflation is welcome, the fight is far from over. High inflation strangles growth and causes pain for families and businesses – that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy.
You can read the full article from the Guardian’s economics correspondent, Richard Partington, here:
Analysts have had some time to digest the 10.1% inflation reading.
David Bharier, the British Chambers of Commerce head of research, said the 10.1% annual rate was still “a very slow move out of the peak”.
Household electricity and gas costs remain by far the biggest drivers, while transport costs saw a further easing. Producer price inflation, however, remains much higher at 14.1%.
The stubbornly high rate means that we are now seeing a compounding effect on what was already a spiking inflation rate this time last year. The peak may have started to pass but prices have settled at a much higher level than two years ago.
Simon French, chief economist at Panmure Gordon, an investment bank, said it was “encouraging” – and he suggested that real incomes (i.e., adjusted for inflation) might rise sooner than expected:
An encouraging UK inflation report. There were just signs in the November & December reports that UK was at risk of becoming an outlier. Less compelling in today's report. Core inflation pressures easing to +5.8% YoY (+6.3% prev.) probably the most pleasing data point. pic.twitter.com/SHr4vYlgIa
— Simon French (@shjfrench) February 15, 2023
With almost all the leading indicators (shipping rates, monetary aggregates, gas prices, producer prices) signalling further declines to come then reasonable to see real income growth returning for UK households rather earlier than feared in the Autumn.
— Simon French (@shjfrench) February 15, 2023
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a consultancy, said the Bank of England may keep interest rates flat at 4% at the next meeting of its rate-setting monetary policy committee (MPC) in March – in order to make sure it does not stifle growth just as the economy is struggling.
January’s data aren’t the final word – February’s data will be published on 22 March, on the day of the monetary policy committee’s vote and one day before its decision is announced-but they should greatly strengthen the MPC’s faith in its forecasts for CPI inflation to fall rapidly back to the 2% target over the next 18 months.
Stock markets around Europe have mostly fallen in the opening mintues of trading, following Asian markets lower.
The FTSE 100 is down 0.2%, with banks the biggest fallers. Commodities companies – including Glencore even as it basks in record profits – dipped in tandem with oil and gold.
Here are the opening snap summaries from across Europe’s biggest markets, via Reuters:
EUROPE’S STOXX 600 DOWN 0.2%
FRANCE’S CAC 40 DOWN 0.1%, SPAIN’S IBEX UP 0.2%
EURO STOXX INDEX DOWN 0.1%; EURO ZONE BLUE CHIPS DOWN 0.1%
GERMANY’S DAX UP 0.1%
Glencore profits triple as it benefits from higher oil and coal prices
If you want to know where some of that money for higher energy prices has gone, here is a handy reminder: commodities company Glencore has reported record annual profits, helped by high oil prices and record coal prices.
The company will reward its shareholders with $7.1bn (£5.8bn) in dividends and share buybacks, it said.
Net profits more than tripled from $5bn in 2021 to $17.3bn in 2022, the FTSE 100 company reported on Wednesday. Its revenues rose 26% – or more than $50bn – to $256bn.
Oil trading profits were a big source of its profits, and its sales of coal benefited from record high prices.
Glencore’s chief executive, Gary Nagle, is pretty clear in what has driven the record profits for the company. He said:
The global pandemic, recovery from it and years of underinvestment, followed by conflict in Europe, exposed pre-existing vulnerabilities in energy security and supply chains, underpinning the generally high and volatile 2022 commodity price environment, which enabled the group to generate record profitability for the year.
And Glencore also noted that its shareholders are on board with its strategy – despite the huge impact that its products have in carbon emissions and other pollutants. It said:
A limited number of shareholders looked for opportunities to accelerate our current total emissions reduction pathway (50% reduction by 2035), while some raised the prospects for incremental growth in our coal production. However, the overwhelming majority of shareholders reiterated their support for our current responsibly managed coal decline strategy and associated targets.
Here is the inflation summary for the last decade: fairly steady around the Bank of England’s 2% annual target, and then lift-off in 2021.
The soaring price pressures were caused by supply chain disruption from the coronavirus pandemic lockdowns, and worsened by the energy crisis caused by Russia’s invasion of Ukraine which helped inflation increase further from February 2022.
Updated
Sterling has dipped further following the lower-than-expected inflation reading.
The pound is now down by 0.6% for the day at about $1.2102 against the US dollar.
Lower inflation might suggest that the doves at the Bank of England could hold sway, and interest rates may not have to rise as far as expected by markets. That in turn makes the pound less attractive to foreign investors.
The Bank’s chief economist, Huw Pill, has already indicated that monetary policymakers are concerned about increasing rates too much – a move that would choke off inflation but could also slow already meagre economic growth (or rather, stasis, in the case of the last quarter). Earlier this month he said:
It is important we do enough to attain our objective to return inflation to within the 2% target. But of course it is also important that we guard against the possibility of doing too much. We need to keep that zen-like balance in our objective.
The inflation data show a pretty marked fall in inflation during January: the headline measure, CPI, fell by 0.6% in January, compared with a fall of 0.1% in January 2022.
The biggest contributor to the decline was transport (particularly passenger transport and motor fuels), and restaurants and hotels, the Office for National Statistics (ONS) said.
Fuel prices have, of course, been one of the most notable inflationary pressures over the past year – along with anything energy-related – after Russia’s invasion of Ukraine roiled energy markets. Energy prices have eased somewhat, helped by a warm winter in Europe, meaning inflation was always likely to fall back.
But that was partially offset by rising prices in alcoholic beverages and tobacco, the ONS said.
UK inflation slowed faster than expected to 10.1% in January
Newsflash: UK inflation slowed to an annual rate of 10.1% in January, according to the Office for National Statistics’ consumer prices index.
That indicates prices across the economy did not rise as quickly as expected in January after a 10.5% reading in December. Economists had predicted a rate of 10.3%.
Updated
Ahead of the UK inflation data, a quick look at where we stand on financial markets.
Sterling is down 0.25% against the US dollar in early trading, at about $1.2140.
FTSE 100 futures suggest London’s blue-chip shares will dip by about 0.2% on opening.
Asian stock market indices in China and Hong Kong fell. Reuters explained:
Asian stocks slipped while the US dollar held firm on Wednesday following US inflation data and remarks from central bank officials that have investors worrying interest rates are going to be higher for longer.
Inflation expected to slow in January - poll of economists
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
Rising energy prices, food prices, broadband prices – the UK economy has been under pressure from inflation since the start of 2021. Today we will find out if those pressures have eased, with the Office for National Statistics due to publish the latest inflation data shortly.
Economists polled by Refinitiv expect the annual rate of the consumer prices index of inflation to drop to 10.3%, down from 10.5% in December. Inflation peaked at a 41-year high of 11.1% in October.
The price pressure was prompted, at least in part, by disruption to global supply chains caused by the coronavirus pandemic lockdowns (and whiplash in the subsequent recovery). Russia’s invasion of Ukraine almost a year ago stoked the fires further by pushing up global energy prices.
Yet now economists believe the UK may have turned a corner, and are preparing for price growth to slow over the course of the year.
Sanjay Raja, a senior economist at Deutsche Bank, said he expects consumer prices index inflation to start a long march from the double digits to about 4% by the final quarter of this year. In a note to clients, he wrote:
After a second consecutive drop in annual inflation to end 2022, we expect headline inflation to continue its slow descent to start 2023. If our inflation projections are broadly on the mark, CPI inflation will register its first monthly drop in 12 months.
Easing inflationary pressures due to falling energy prices. Looking ahead, we continue to see inflation slowing down more acutely from H2-23. Falling expected energy prices, easing core goods inflation, and lower food prices over the course of the year will continue to drag on price momentum.
Yet even if price increases slow, UK households are still expected to have a tough time this year.
Edward Allenby, a UK economist at Oxford Economics, a consultancy, said he expects real income (adjusting for inflation) to fall by 1.2% in 2023. Inflation, rising mortgage costs as interest rates rise, and a slight tightening of government spending will all contribute to that drop in living standards, he said.
UK consumers endured a torrid year in 2022, as very high inflation weighed on spending power. We estimate that real household disposable income fell by 1.7% over the calendar year, which would be the biggest year decline since 2011. This year will be another challenging one for household finances as inflation is set to remain high, fiscal policy is being tightened, and mortgage costs will rise.
So the chances of avoiding a large fall in consumer spending are likely to rest on consumers saving less or borrowing more than they currently do – neither of which they have shown any inclination to do so far.
Much more detail to come after 7am GMT.
The agenda
10am GMT: Eurozone industrial production (December; previous: 2% year-on-year; consensus: -0.7%)
1:30pm GMT: US retail sales (January; prev.: -1.1% month-on-month; cons.: 1.8%)
2pm GMT: Christine Lagarde, president of the European Central Bank, at European parliament
