Inflation peaked, but economy still on shaky ground

According to the Office of National Statistics, headline inflation fell for a second month in a row after a peak of 11.1 per cent in October that was caused by the rise in domestic energy bills.

BCC head of research, David Bharier, said a second consecutive easing in the rate of inflation to 10.5 per cent, while minimal, suggests the peak has now passed. 

“A further fall in the growth of fuel costs was partially offset by continued increased inflation within the hospitality sector. But this simply means that prices will stabilise at a much higher level than one year ago,” he said.

“Inflation is still by far and away the top issue affecting businesses. Our latest research shows that inflation is a concern for 80 per cent of firms, close to the highest on record.

“Small firms continue to face a tidal wave of higher costs from energy, raw materials, interest rates, and higher taxation. Businesses have told us of 600 per cent increases in gas and electricity costs. This makes investing for growth impossible.

“The scaling back of Government support on energy costs means that firms will look to the Spring Budget for concrete action to create a much more stable environment to invest, focusing on infrastructure, skills, trade, and green tech.”

However, there is some optimism from economists who believe the dip in inflation could also signal a pivot for monetary policy.

Yael Selfin, chief economist at KPMG UK, said there is now an expectation that inflation will continue falling throughout this year, reaching the Bank of England’s 2 per cent target by mid-2024.

“Falling inflation will also come as a relief to Bank of England’s policymakers who may see this as an opportunity to slow the pace of further rate rises,” she said.

“With the effects of past rate rises still passing through the UK economy, we could see the base interest rate peak at 4 per cent in the first quarter of the year.”

Jake Finney, economist at PwC, said the latest figure means inflation has fallen for two consecutive months for the first time since the pandemic started, providing the best evidence yet that inflation has peaked.

“However, the UK still ends 2022 with an inflation rate that is almost double the 5.5 per cent inflation rate it started the year with,” he said. 

“Seven of the 12 CPI divisions made downward contributions to the headline inflation rate in December, suggesting that inflation pressures are easing almost across the board. The transport sector made the largest negative contribution, as petrol and diesel prices continued to fall back from the heights they reached last summer. 

“Going forward, we expect that the headline inflation rate will continue to decline throughout 2023, and the UK will end the year with an inflation rate of around 3–3.5 per cent. Falling energy prices mean that average household energy bills could fall below the government’s cap of £3,000 a year in the second half of 2023, which should provide further relief for households.”

Lisa Hooker, industry leader for consumer markets at PwC, said the slight decline in headline inflation will be of little consolation to hard-pressed consumers, who are already having to contend with the worst decline in real earnings in two generations.

“While cheaper petrol, clothing and footwear provide some respite, the price of many day-to-day essentials — groceries in particular — continued to defy gravity in the critical run-up to Christmas, meaning double digit increases in the cost of many families’ first, back-to-normal Christmas dinners together since before the pandemic,” she said.

“The question is whether consumers have had to dip into their savings — or borrow — in order to fund their Christmas spending, and whether this will put a dampener on spending now that we’re into 2023. A recent study between PwC UK and TotallyMoney suggested that 8.9m UK adults show signs of financial fragility.

“There will certainly be no let up in food price inflation at least until the summer. Combined with the energy price guarantee rising in April, the reality for retail and leisure companies is that there will simply be less disposable income to go around for the first part of the year and therefore a fight for share of wallet from shoppers.”