UK inflation could slow further

The UK’s Consumer Price Index (CPI) report is set to be released on Wednesday, January 17, with major banks forecasting the upcoming inflation print. The looming data follows a weak November report, with core inflation falling slightly to just below 5% year-on-year for the first time since January 2022.

Headline inflation for December is expected to fall a tick to 3.8% YoY, while core is expected to fall two ticks to 4.9% YoY, making headline the lowest since September 2021. Services CPI inflation is forecast to ease two ticks to 6.1% YoY.

TDS economists expect another subdued report, with the headline decreasing slightly to 3.8% YoY and the core sliding to 4.9% YoY. Inflation in services is probably going to drop to 6.0% YoY. The Bank of England (BoE) is anticipated to begin reducing the bank rate in May, but it will be simpler to defend a dovish turn at the February meeting if there is another poor inflation report.

It is anticipated that UK services inflation will be 6.1%, significantly less than the 6.1% predicted by the Bank of England in its policy report from November. However, things will start to change as we head towards summer, with moderating food and consumer goods inflation and lower petrol prices. May’s headline inflation rate is predicted to drop to 1.6%, and by summer, services inflation should drop to 4%.

Lower food and goods inflation will contribute to headline inflation, with core easing by 0.3pp to 4.8%. The continued easing in pay growth and supply shocks should drag inflation below 2% in April. However, the recent Red Sea tensions and increased border checks for food could see stronger inflation than currently forecasted.