Inflation Forecast to Reach Year-Low, Fueling Rate Cut Expectations
Inflation is poised to decline to its lowest point in nearly a year, according to the Bank of England governor, offering a significant boost to hopes for accelerated interest rate reductions. This development comes during a busy week for UK economic data, with economists anticipating a sharp easing in the Consumer Price Index (CPI), the primary benchmark for price inflation, after it exceeded estimates in December.
Sharp Decline in CPI Expected
A Bloomberg poll of City analysts predicts inflation will fall to three per cent, marking the lowest level since March 2025. This follows a dramatic surge in December, driven largely by food inflation, which hit 4.5 per cent compared to 4.2 per cent the previous month. The Bank of England closely monitors this measure, as grocery costs heavily influence inflation expectations.
The December increase was fueled by sharp rises in coffee and sugar prices, which have been targeted by "sin" taxes. Over the past year, sugar and confectionery prices have spiked the most, contributing to food and drink inflation figures reaching 10.2 per cent. This trend emerged after pre-packaged milkshakes and lattes were included in the government's new sugar tax, aimed at tackling obesity in the UK.
Food Inflation Remains a Concern
Ellie Henderson, an economist at Investec, noted that food price growth likely fell to 4.2 per cent but cautioned that food inflation remains a "key concern" for policymakers. Despite the expected overall dip in inflation, some hawks on the Monetary Policy Committee (MPC) are anticipated to maintain their stance against rapid rate cuts.
Bank of England's Divided Outlook
Bank of England chief economist Huw Pill recently stated at an event with Santander that he believes rates are already "a little bit too low," suggesting further decisions will be closely contested. In early February, the MPC voted 5-4 to hold rates at 3.75 per cent, a narrower margin than expected.
Governor Andrew Bailey, despite voting for a hold, signaled a dovish outlook, maintaining that further cuts are likely as price growth is projected to fall near the Bank's two per cent target by April. "We now think that inflation will fall back to two per cent by the spring," Bailey said, contrasting with previous forecasts that only showed inflation dropping to target levels by 2027. "That's good news."
Upcoming Economic Data Releases
The latest inflation figures are scheduled for release on Wednesday, following new unemployment data on Tuesday. The week will conclude with borrowing data and retail sales figures on Friday, providing a comprehensive view of the UK's economic trajectory.
