UK annual inflation falls again to 10.5% in December

The rate was slightly lower than analyst expectations, which had forecast 10.6%. On a monthly basis the CPI rate of inflation was 0.4% in December 2022 compared to 0.5% in December 2021.

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Published: 18 Jan 2023 Updated: 27 Jan 2023

The UK’s headline consumer prices index rate of inflation fell to 10.5% in December from 10.7% in November, the Office for National Statistics revealed today, The rate was slightly lower than analyst expectations, which had forecast 10.6%. On a monthly basis the CPI rate of inflation was 0.4% in December 2022 compared to 0.5% in December 2021.

The largest downward contribution to the change in the CPI annual inflation rate between November and December 2022 came from transport (particularly motor fuels), clothing and footwear, and recreation and culture, while rising prices in restaurants and hotels, and food and non-alcoholic beverages made the largest partially offsetting upward contributions.

Core inflation (excluding food, energy, alcohol and tobacco) for December stayed at an annual 6.3%, unchanged from November and slightly above analyst expectations of 6.2%.

Daniel Casali, Chief Investment Strategist at wealth management firm Evelyn Partners, said the reading will encourage the belief that UK inflation has peaked:

‘Another slowing in annual inflation – the second since October’s peak of 11.1% - will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data. But these are fairly marginal decelerations in prices, inflation remains elevated and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households. The Bank of England will welcome softening inflation but for its rate-setters the receding of price pressures has some way to go before they take the foot off the rates pedal, and particularly if growth continues to surprise on the upside and if growing wage demands prove successful.

‘Inflation is being led down by energy prices, as wholesale gas prices soften and benefit from less drastic annual comparisons. Energy prices started to surge in late summer 2021, well before Russia’s invasion of Ukraine, so wholesale gas prices had already risen above-trend in December 2021.

‘High frequency data show the energy effect has further to go: wholesale one-month ahead natural gas prices have now fallen to below the pre-Russian invasion of Ukraine level and are down 10% so far in January. Petrol prices are also declining, with the latest price of unleaded petrol on 9 January at £1.50, down from £1.52 at the end of 2022 and a peak of £1.92 last summer. Expect lower energy prices to exert downward pressure on inflation, at least in next month or two.

‘Looking beyond the near term, slowing economic growth, along with higher taxes, rising mortgage rates and less government support on energy prices next year is likely to be a drag on real household take-home pay in 2023. Lower discretionary incomes should prove to be a significant headwind against another upward acceleration in inflation from here. Moreover, high base effects from sharp price increases in 2022 will make it difficult to sustain high annual CPI inflation rates in 2023. Finally, the impact of supply chain disruption on prices in the goods market should begin to fade, while recent sterling appreciation will reduce the cost of imported goods.

‘The BoE expects headline CPI inflation essentially to halve to around 5% by the fourth quarter of 2023. Even so, core CPI inflation (excluding food, energy, alcohol and tobacco) could remain fairly sticky. The risk to the BoE’s inflation outlook is the potential secondary impact of workers demanding higher wages to keep up with the high cost of living. With the unemployment rate still near cyclical lows, there is a possibility that higher wage rates become entrenched in the economy, increasing the risk of a wage-inflation upward spiral.

We expect the Bank’s monetary policy committee to raise interest rates again at its next meeting which concludes on 2 February – most probably by 50 basis points to 4.0%.’

For investors

‘The UK economy is not the equity market, and this probably explains why UK stocks gained nearly 17% more than the rest of the world in 2022, its biggest beat since 1990. Moreover, UK-listed multinationals are largely linked to what goes on in the rest of the world. Looking forward, the reopening of the Chinese economy from Covid zero policy is a shot in the arm for externally focused UK companies. China seems to be willing to go for growth by relaxing restrictive policies applied to its all-important property sector.

'According to a Bloomberg report in early January, the Chinese authorities are set to raise lending caps for developers and extend the deadline for firms to meet debt limits. This could be a green light from the Chinese leadership to go for growth and should support overall UK EPS growth. Analysts are already starting to revise up 2024 EPS growth expectations in anticipation of global economic recovery. Given low valuations, UK stocks can continue to recover this year.’