22 March 2023
Inflation: what goes up, must come down - but not just yet!
Around this time last year we published an article to help explain inflation - what it is, how it is measured, what causes it, how it might be controlled and why inflation matters - click here to get a reminder of that.
One year on, and just as it looked like inflation might have started a steady descent from its peak, we are now seeing that the downhill path may not be entirely straightforward.
It's time to provide an update on current inflation rates.
What's the current rate of inflation?
- CPI inflation was 10.4% in the 12 months to February 2023, up from 10.1% in January.
- CPIH inflation was 9.2% in the 12 months to February 2023, up from 8.8% in the 12 months to January.
- RPI inflation was 13.8% in the 12 months to February 2023, up from 13.4% in the 12 months to January.
ANNUAL INFLATION - %
The chart reminds us that just over two years ago we were still pondering whether interest rates would be forced to turn negative to combat deflationary pressures. Fast forward two years and we are still in an extended period of double-digit inflation that will renew pressure on the Bank of England's Monetary Policy Committee to increase interest rates for the eleventh time in fifteen months.
The largest upward contributions to the latest inflation figures have come from restaurants and cafes, food, and clothing. Downward contributions have come from recreational and cultural goods, and services (particularly recording media), and motor fuels.
Despite the latest upward movement in inflation, the longer-term outlook remains improved. As energy prices come down, inflation is expected to fall sharply to 2.9% per cent by the end of 2023, according to the forecasts provided by the Office for Budget Responsibility (OBR) in their March 2023 Economic and Fiscal Outlook - that was referred to heavily by the Chancellor as he delivered his Spring Budget.
And what has caused this improved outlook? Primarily a quicker than previously expected drop in wholesale gas prices, meaning that energy bills will fall below the energy price guarantee limits. Nevertheless, some concerns remain over domestically generated inflation from wage growth.
The improved outlook had meant that Interest Rates (currently at 4%) were expected to peak at around 4.25% later this year. The next decision on interest rates will be taken by the Bank of England's MPC on the 23rd of March, the surprise increase in inflation may encourage the next interest rate increase to be sooner rather than later.
QUARTERLY CPI INFLATION - %
