Surprise December 2024 Inflation Fall

The Office for National Statistics (ONS) has this morning released inflation figures for the UK for December 2024.

Consumer Prices Index (CPI) had a surprising fall by 0.1% to 2.5%.  This is still 0.8% higher than in September at 1.7% but we suggest inflation is going to remain stubborn and even increase again as:

• Costs of Energy/Utilities rising as the energy price cap has increased.
• Oil prices are on the way up.
• Gas prices are on the way up.
• Goods and services costs will rise as businesses get to grips with the damaging Employers National Insurance Contributions increase from 12.8% to 15% and the secondary earnings threshold (the point at which employers pay NIC on their employee’s earnings) will reduce from £175 per week (£9,100 pa) to just £97 per week (£5,000 pa).
• National Living and National Minimum Wages increasing in April.
• Associated employer pension contribution costs will rise on wage rises.
• These increased business costs will no doubt be passed onto consumers as it will be retail, supermarket and hospitality employers that will be hardest hit by this.  Labour is stimulating inflation, whether we like it or not, and we have long suggested that all Governments need high inflation to devalue their massive public sector and covid-19 debt mountains.
• Mortgage interest rates are also rising as ‘swap rates’ (the rate at two institutions lend/borrow money between each other) is rising due to expected stubborn inflation and therefore sustained higher Bank of England base rates.

As we suggested last month, Labour’s Fiscal policy is to tax us more and then spend more on infrastructure and public services so more money being spent by government means more money in the economy so the fall in inflation was a surprise.  Upward pressure came from communications, transport, and housing costs whilst downward pressure came again from restaurants and hotels, clothing and footwear, alcohol and tobacco, recreation and culture as well as food and non-alcoholic drinks.  No doubt prices were reduced for the festive season with ‘Black Friday’ sales and more people socialising.

RPI Down by 0.1%

The old measure of inflation RPI, an arithmetical mean of the average prices of a basket of household spending (rather than the geometric mean for CPI) and still our preferred measure of real inflation, also fell slightly to 3.5% after last month’s increase and is now back to August’s figure of 3.5% pa.

Comment

Last month, we had already forecast there would be no interest rate cut on 19^th December, and this proved correct.  The mortgage market was confused but now seems firmly on a trajectory of holding or increasing rates.  This is partly due to Rachel Reeves’ stance that she will not break her fiscal rules and will not borrow more to pay for public services meaning more tax and a lack of confidence in the UK government to meets its debt payments pushing government borrowing costs (gilt yields) up.

This small fall may give the Bank of England room to cut interest rates on 6^th February, but we suspect they may now hold again given pressure on the £ as gilt yields and government borrowing costs rise.  Higher interest rates make the £ more attractive thus strengthening it.  We repeat, ‘recession here we come’.

Key dates for us all:

• Next Bank of England MPC interest rate decision 6 February 2025.
• Next ONS inflation report 19 February 2025.