Inflation set to fall – but fears Red Sea crisis could push prices higher take hold
Inflation is expected to continue its descent when new figures are released on Wednesday, amid growing fears that the conflict in the Middle East could spark a resurgence in inflation.
Economists expect the headline consumer price index (CPI) for December to come in at 3.8 per cent, marginally lower than the 3.9 per cent recorded in November.
The dip in the headline rate will be driven by the continued easing in food inflation while energy prices will also continue falling.
Core inflation – which strips out volatile components and is seen as a more accurate gauge of inflationary pressures – is expected to fall to 4.9 per cent, down from 5.1 per cent the month before.
Although December’s figures will still show some progress in the fight against inflation, it will be at a much slower pace than the last two months.
In October and November, inflation came in meaningfully below both market expectations and the Bank of England’s own forecasts. The Bank thought inflation would only have fallen to 4.6 per cent by the turn of the year.
The Bank is likely to face more pressure to start lowering interest rates following the figures. Markets are betting that interest rates will be lowered in the first half of this year, although rate-setters have so far insisted it is “too early” to lower rates.
The Bank has often pointed to elevated levels of wage growth as a sign that domestic inflationary pressures remain too strong to start lowering rates.
Investors will get fresh wage growth figures on Tuesday with City economists predicting that annual wage growth will have eased to 6.6 per cent in the three months to November.
December’s inflation data will be published amid widespread concern that an escalation of conflict in the Middle East could see a resurgence in inflation.
Hundreds of container ships have been forced to sail around the southern tip of Africa rather than going through the Red Sea, where the Houthis have been targeting ships. Last week the UK and US launched air strikes against the Houthis in an attempt to deter the Iran-backed rebel group from disrupting global shipping routes.
Justifying the airstrikes, the foreign secretary, Lord David Cameron, said “prices will go up in Britain and across the globe” if the Houthis continue threatening global supply chains.
Business leaders have also expressed concern about the potential impact on inflation. Last week, Ken Murphy, chief executive of Tesco, warned that the disruption to shipping “could drive inflation on some items“.
Experts suggested, however, that it is still too early to tell whether this disruption will prompt any meaningful uptick in inflation.
Gerald Khoo, a transport analyst at Liberum, said higher shipping costs were unlikely to lift inflation.
“We see limited prospects for this impacting inflation at the economy level,” he said.
Analysts at Capital Economics agreed. “The redirecting of trade ships away from the Red Sea and the associated rise in shipping costs are unlikely to lead to a resurgence in global inflation,” the analysts said.
However, they did stress that an escalation into a wider conflict “would pose inflationary risks via higher energy prices”.