The latest UK CPI has increased for the first time since February 2023 to 4.0 per cent in the 12 months to December from 3.9 per cent.
Broadstone head of market engagement Simon Kew says: “After a significant decline to 3.9 per cent in November, inflation surprisingly edged back upwards again to 4.0 per cent in December.
“It marks the first rise in inflation since February but further falls are anticipated with some economists even predicting inflation to drop below the Bank of England’s target of 2 per cent in the first half of 2024 earlier this week. In spite of the rise in December, inflation is still projected to weaken over the course of the year, stoking predictions of rate cuts despite the Bank of England’s public pushbacks against these market expectations.
“For pension schemes, the faster than expected fall in inflation over the past six months could reduce the scrutiny on discretionary increases as member benefits are more likely to keep pace with the cost of living.
“After consecutive bumper increases to the State Pension, retirees without Defined Benefit pensions often take a keen interest in the inflation print to see whether it could drive another significant Triple Lock uprating. But with inflation looking to be coming under control, this group should instead be keeping tabs on the earnings figure over the coming months.”
XPS Pensions Group partner Danny Vassiliades says: “This time last year, CPI inflation stood at 10.5 per cent and the Bank of England was in the middle of 14 consecutive interest rate rises in a bid to control it. Whilst CPI remains above the Bank’s 2 per cent target rate, today’s announcement shows what a difference a year can make.
While we are watching the unfolding situation in the Red Sea and considering potential inflationary impacts of this carefully, some forecasts are suggesting that CPI inflation could hit the Bank’s 2 per cent target by mid-2024. In this scenario, many pension increase limits will not apply, to the benefit of pension scheme members.”
AJ Bell head of financial analysis Danni Hewson says: “It’s a tiny spike but psychologically it’s a mountain. Households had begun to hope the colossal hikes that had taken a salami slicer to their budgets over the past year might finally be in the rear-view mirror.
“People know prices are still rising, you can’t do your weekly shop without accepting that, but the moment at the checkout when the cashier tots up the damage had begun to feel a little less overwhelming.
“Even those who aren’t glued to the news on their phones throughout the day will have gleaned that the situation in the Red Sea is something that might have a tangible impact on everyday life.
“But that disruption wasn’t captured by these figures, other factors were at play in December. One is a UK quirk – the impact of increased duty on tobacco products created the lion’s share of last month’s hike. But it’s the uptick in service inflation which will trouble Bank of England policy makers. That’s the sticky bit that will make the last few percentage points harder to whittle away.
“The UK isn’t alone, other countries including the US have found themselves in the same situation, and it seems the path to that hoped for ‘soft landing’ will have a few detours. Whilst markets are still hopeful rate cuts will come thick later this year, the date for that to commence has slipped back.
“Looking forward there are so many variables at play, central bankers are likely to want to keep their powder dry for as long as they can. But walking that tightrope has just got a little bit harder as we wait and see whether the situation in the Middle East escalates or if a quick solution can be found.”
Standard Life managing director for retail direct Dean Butler says: “With January cheer in short supply, the impact of inflation moving further from the Bank of England’s 2% target will come as a blow to struggling households. It had seemed that the squeeze on people’s finances had been slightly loosening, with lower inflation forecast and one of the UK’s largest lenders yesterday lowering their mortgage rates in anticipation of the Bank of England potentially lowering the base rate soon. However, we might now have to wait slightly longer for the pressure to ease.
“Hopefully this month’s figure is a blip, and we’ll see the forecasted fall in inflation soon. For those who are able to save, now’s still a good time to shop around for best-buy accounts. If the Bank of England do decide to lower interest rates, it’s likely some of today’s inflation-busting deals will disappear.
“People are famously loyal to their bank, but people can now switch bank with the click of a button, often with a financial incentive to do so and securing the best possible rate really can make a difference over a couple of years – our analysis found that if inflation fell to the Bank of England’s target of 2%, someone with £10,000 to save who grabbed a 5% interest deal could see their savings worth £10,588 in real terms after two years. However, someone with the same amount to save who missed the best offers and picked up a 3% deal would have £400 less after two years (£10,189).
“For those with a greater appetite for risk, investing offers a greater chance of substantial returns, but there’s always the chance of losing money too. People able to take a long-term view could consider saving into a pension, which offers both the benefits of investing and tax efficiency.”
