- CPI rises to 3% in January, up from 2.5% in December
- On a monthly basis CPI actually fell by 0.1%
- Markets are pricing in two interest rate cuts by September
- Cutting rates in the face of rising inflation is a sticky wicket for the Bank of England
Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest UK inflation figures:
“Prices actually went down in January, but inflation went up. This apparent contradiction can be explained by base effects – in other words, prices fell more last January, leading to a lower base level for comparison. CPI fell by 0.1% in the month to January 2025, but rose by 3% year on year, up from 2.5% at the last reading in December.
“Inflation is now 1% away from target and heading in the wrong direction, and consumers better buckle up for prices to trend higher throughout this year. The Bank of England reckons inflation will hit 3.7% in the third quarter, and that’s without a potential tariff shock stemming from US trade policy. The chancellor’s decision to raise National Insurance and the National Living Wage from April will no doubt feed into the inflationary dynamic. A survey conducted by the CIPD found that 42% of affected employers intended to raise prices to offset higher costs.
“The market is still expecting two interest rate cuts from the Bank of England in the next six months or so. It’s easy to see why. Gloomy economic projections from the central bank suggest a paucity of domestic demand, and two members of the rate setting committee actually wanted to cut rates to 4.25% at the last vote. As well as feeding through into rising prices, higher rates of National Insurance are also expected to put pressure on head counts as businesses adjust to the increased costs of employing staff, which will also serve to dampen demand. Meanwhile the Bank’s central forecasts show inflation falling back to 2% in the medium term based on rate expectations. However those expectations were measured in January, when global inflation fears drove yields and rates higher.
“There are risks to the market’s view that rates will move lower throughout this year. At 5.9%, pay growth is high and seems to be on a rising trend, which may be pumped up by the rise in the National Living Wage. A strong dollar and trade tariffs could also add to inflationary pressures. To cut rates in the coming months, the Bank of England would need to do so in the face of what it admits will be rising inflation. Of course, the Bank must look to the longer term when it comes to monetary policy, but cutting rates while inflation is heading in the wrong direction is still a pretty sticky wicket.”
