InflationWatch - February 2025

In the wake of the Covid-19 pandemic, inflation rose further and for longer than most market participants expected in many countries, including the UK.

Expansive monetary policy and fiscal stimulus, supply-chain disruptions and a shift in demand from services to goods during the pandemic all placed upwards pressure on inflation. Moreover, the Russia-Ukraine conflict, and the resultant global supply-shock, exacerbated these price pressures. 

In this edition of InflationWatch, you'll find an update on the latest position of inflation, consensus forecasts on future inflation rates and our view on where the balance of risk lies in the outlook for inflation and interest rates. 

This quarter's highlights include: 

• Year-on-year headline CPI rose to 2.5% in December from 1.7% in September. Core inflation, which excludes volatile food and energy prices, unexpectedly fell in December, returning to September’s level of 3.2%.
• With disinflation in goods, foods and energy prices in the rear-view mirror, and set to become a positive contribution in 2025, consensus forecasts suggest headline CPI will rise above 3.0% in the autumn this year. 
• Underlying inflation pressures remain elevated: average weekly earnings growth rose 5.6% year on year in the 
  three months to end-November, and service-sector inflation rose 4.4% in the 12 months to end-December. 
• The national insurance increase announced in the October budget is a stagflationary shock: surveys suggest employers intend to respond by cutting back recruitment and/or by raising prices.
• Elevated real interest rates allowed the Bank of England (BoE) room to reduce rates in November and February, taking the base rate to 4.5% pa. However, the Monetary Policy Committee’s cautious wording, higher inflation forecasts and pay-survey data suggest only one to two further rate cuts this year. 
• With growth and price pressures moving in opposite directions, the risks around this outlook are finely balanced. Should weaker employment growth result in dwindling domestic demand and a larger output gap, reducing inflation pressures, we expect the BoE to cut rates more quickly. However, if inflation pressures persist, the central bank is likely to stay cautious, despite the weak growth backdrop.

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Important information

This InflationWatch has been compiled by Hymans Robertson LLP® (HR) as a general information summary and is based on its understanding of events as at the date of publication, which may be subject to change. It is not to be relied upon for investment or financial decisions and is not a substitute for professional advice (including for legal, investment or tax advice) on specific circumstances.

HR accepts no liability for errors or omissions or reliance on any statement or opinion. Where we have relied upon data provided by third parties, reasonable care has been taken to assess its accuracy however we provide no guarantee and accept no liability in respect of any errors made by any third party.