Inflation “stickiness” should prove temporary, the EY ITEM Club think-tank declared yesterday as it predicted cuts in UK interest rates would start in May.
Scottish Chambers of Commerce’s latest survey, published today, reveals 52% of businesses north of the Border reported concern over inflation in the fourth quarter of last year, down from 75% in the preceding three months.
While the proportion reporting such concern in the fourth quarter was the lowest in 2023, Scottish Chambers noted it was still 20 percentage points higher than the 32% recorded in the first quarter of 2021 ahead of the inflation crisis.
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Concern over interest rates was reported by 40% of Scottish firms in the fourth quarter of last year. Scottish Chambers noted this was down 10 percentage points on the previous three months but was “still significantly higher than the 15% recorded in Q1 2021 pre-inflation crisis”.
The Bank of England has hiked UK base rates from a record low of 0.1% in December 2021 to 5.25%.
Scottish Chambers’ survey shows 40% of firms were impacted by recruitment difficulties in the fourth quarter.
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The Office for National Statistics said yesterday that annual UK consumer prices index inflation rose from 3.9% in November to 4% last month. Economists polled by Reuters had, overall, forecast a drop in annual CPI inflation to 3.8% in December.
A sharp rise in tobacco duty, and a bigger impact from seasonal hikes in air fares arising from an increase in weighting put upward pressure on inflation last month.
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The EY ITEM Club noted the annual CPI inflation figure for December was “slightly above economists’ expectations, but still significantly below the Bank of England’s last forecast”.
Martin Beck, chief economic advisor to the EY ITEM Club, noted annual core inflation, which strips out the volatile food and fuel categories, was unchanged at 5.1% between November and December.
He flagged “a good chance that inflation may rise again this month”, noting January 2023 saw “some large and unusual falls in a number of services prices”.
Mr Beck noted: “Depending on the extent to which those falls aren’t repeated, the result could be to mechanically push up inflation in January 2024.”
However, he declared: “Stickiness in inflation at the turn of the year should prove temporary. Further falls in wholesale gas prices in recent weeks point to household energy bills falling by close to 15% in April, when the Ofgem energy price cap is recalculated. Petrol prices are down to the lowest in over two years, and businesses’ input costs fell in year-on-year terms in December for the seventh month in a row. This should gradually filter through to prices in the shops. Meanwhile, pay growth has continued to slow.”
Mr Beck added: “As a result, the EY ITEM Club thinks there’s still a good chance that inflation will fall to the Bank of England’s 2% inflation target by May. This should give the green light for the Monetary Policy Committee to start cutting interest rates in the same month, with the EY ITEM Club expecting Bank Rate to fall from the current 5.25% to 4% by the end of this year.”
He noted “the effect of ongoing geopolitical tensions on shipping costs could potentially slow inflation’s descent”.
However, Mr Beck added: “Shipping costs represent only a relatively minor contribution to the prices consumers pay for goods. It’s therefore hard to see how shipping issues could present a serious inflationary threat.”
Noting the UK Government’s announcement of higher duty in the Autumn Statement in November, the ONS observed: “Tobacco prices rose by 4.1% between November and December compared with a 0.3% rise between the same two months last year, leading to an annual increase of 16%.”
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