Rosey outlook unlikely on Valentine's Day as inflation set to rise again to 4.2%

Mirror   13/02/2024 14:43

The Chancellor might be in for a Valentine's Day shock as new data on Wednesday could reveal that inflation rose for the second month in a row.

Economists predict that Consumer Prices Index inflation, which measures household costs, increased from 4% in December to 4.2% in January. This would be tough news for households as their costs are rising faster than at the end of last year, even though inflation is still less than half where it was a year ago.

It could also put a dent in the Government's promises to help households by getting inflation under control, but this is likely to be a short-term hiccup before inflation starts to drop again. Samuel Tombs, the chief UK economist at Pantheon Macroeconomics who thinks that inflation hit 4.1% in January, said that regardless of Wednesday's data, inflation is likely to fall significantly, to 3.4%, this month.

Economists will be keeping an eye on the data to try to work out what impact it might have on the Bank of England. The Bank's Monetary Policy Committee (MPC) has the job of keeping inflation as close to 2% as possible.

One of the main ways it does this is by changing interest rates. By increasing rates it limits the amount of money that mortgage holders have to spend, therefore reducing demand for goods and services. That can help ease pressure on prices.

If inflation is higher than the 4.1% expected by the Monetary Policy Committee (MPC), it could delay cuts to the base rate. Higher wage rises, as reported by the Office for National Statistics, could also cause a delay.

Rob Morgan, chief investment analyst at Charles Stanley, said: "Today's wage rises contribute to tomorrow's spending power, impacting demand and influencing inflation, so the Bank will be keenly monitoring average earnings growth in particular. Resilient wages have been a driver of sticky consumer price inflation, and they are not falling back into line as fast as the BoE (Bank of England) would like as it looks to return inflation to the 2% target."

Furthermore, an almost 10% increase to the national minimum wage from April could add more pressure on prices. This stands to increase costs for employers and boost household spending power. Martin Beck, chief economic adviser to the EY Item Club, said: "On balance, the EY Item Club thinks the latest pay data should further calm the MPC's concerns about the threat posed by a tight labour market to achieving low inflation on a sustainable basis."

"The committee will likely want to assess the impact of April's sizeable rise in the national living wage before it's sufficiently reassured on that subject. But the EY Item Club continues to think the MPC will start cutting interest rates in May, with a series of further reductions in bank rate following over the course of this year."

On Tuesday, US figures revealed inflation dove to 3.1% from 3.4%, but this slowdown was less than the drop to 2.9% that was expected.

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