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CPI inflation rose slightly from 3.9% to 4% in December. Economists had predicted a small drop.
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Prices were up 0.4% in a month – the same as a year earlier.
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It’s a long way from the peak at 11.1% in October last year, but clearly this isn’t going to be a smooth downwards path.
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Core CPI inflation (stripping out energy, food, alcohol and tobacco) stuck at 5.1%.
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What next?
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What it means for savings and mortgages
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What it means for pensioners.
- What it means for annuities.
The ONS has released inflation figures for December: Consumer price inflation, UK - Office for National Statistics
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“This bounce in inflation isn’t a massive movement, and isn’t dramatically different to the forecasts, but it’s a surprise, and the markets really don’t like surprises. It’s a salient reminder that inflation is likely to trend downwards from here, but not particularly fast, and with plenty of bumps along the way.
It’s horrible news for those who have been struggling for so long now. The new HL Savings & Resilience Barometer shows the cost of living has increased 18.4% in the past two years. Those whose budgets are on a knife edge are holding their breath for a slowing of inflation, so the fact it’s proving stubborn will be a bitter blow.
Cigarettes and alcohol were our undoing, up 12.9% in a year. The price rise owes an awful lot to the rise in tobacco duty, which meant tobacco prices were up 16%. Alcohol played its part too, as our festive tipples were slightly cheaper in December – but the previous year they had been discounted even further.
There was also a small rise in the inflation rate of recreation and culture. This tends to be fairly wayward, because it owes a lot to the price points of the best-sellers – including computer games – which can vary enormously from one month to the next.
The holiday booking season also saw a bump in the price of air fares. They always rise at this point in the year, as seats start to go, but this year they rose more than last. Used car prices were also on their way down again. They’re now down 8.4% in a year, as the pandemic boost meant an awful lot of people have a new used car, so demand has fallen away. It meant that although petrol prices fell an impressive 8% in a year and diesel was down 15.5%, the annual drop in transport costs wasn’t as big as it had been the previous month.
A real positive is that the inflation rate of food and non-alcoholic drink eased again slightly. Of course, this is very different from prices actually coming down, and they’re still up 8% in a year and 26% over two years. However, the rate has eased for nine consecutive months, bringing us down from the painful high of 19.2% back in March.
What next?
We always knew inflation doesn’t rise and fall in straight lines, but this demonstrates that the path is going to be bumpy. The trend is likely to be downwards, especially with the World Bank expecting global growth to slow, and given the fact that the UK economy is already flirting with recession. However, there are likely to be more knocks on the way, with conflict in the Red Sea raising the risk of supply shortages, which could feed into higher prices. There’s the risk this could end up throwing a real spanner in the works.
The market had been predicting a rate cut as soon as May, we’ll have to see whether this surprise rise in inflation prompts something of a rethink. The Bank of England has continued to emphasise that interest rates will stay as high as they have to for as long as is needed, so we could see this pushed back a little.
What it means for savings and mortgages
Savings rates had already reacted to expectations of lower inflation and rate reductions from the Bank of England, so fixed rates have been falling. It’s still possible to get more than 5% over one or two years, but longer-term rates have dropped below this threshold. The best five-year bond is only a fraction over 4.5%. This surprise rise in inflation could force a slight rethink on when those rate reductions are likely to come, and we could see a pause in savings rate cuts – or even some better deals.
The expectation of lower inflation figures is factored into the mortgage market. It means we’ve seen some chunky cuts – including the high street giants. The average 2-year rate has now dropped to 5.62%, according to Moneyfacts - a full percentage point lower than it was four months ago. Even the big lenders are offering rates below 4%. This surprise rise in inflation could mean we get a pause in the cuts, and there’s a chance some of the better deals could go sooner rather than later, so if you are in the market for a fix, it’s worth acting as soon as it makes sense for you."
What it means for pensioners
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:
“Today’s shock rise demonstrates that inflation is a tricky beast to control and that the path downwards will not always run smooth. The stubborn nature of inflation has hit everyone’s wallets, including pensioners, for whom April’s 8.5% state pension boost cannot come quickly enough. After a tough year, this inflation busting rise can open up some breathing space in sorely stretched budgets which could come in handy if inflation does take longer to hit target than first thought.
What it means for annuities
Stubborn inflation will also be a factor for those looking to plan their retirement income. Those in drawdown may find they need to increase withdrawals to keep up with increases in their day to day costs, and those in the market for an annuity may look at an inflation proofed product.
Annuity incomes have come off the highs we saw in the aftermath of the Mini Budget, but still remain much higher than we have seen in recent years. A 65-year-old with £100,000 pension can currently get an income of up to £6,781. This is significantly higher than the £4,626 you could get back in January 2021.
However, inflation-linked products offer much lower starting incomes – an RPI linked annuity currently offers a starting income of £4,316 so you will need to consider whether you can afford to take the income hit now for the prospect of getting higher incomes in future.
Another option could be to annuitise in slices throughout your retirement, rather than all at once. This would enable you to keep a portion of your pension invested, which gives you extra flexibility and also allows you to annuitise at higher rates as you age. You may also find that you qualify for an enhanced annuity at some point during your retirement which would give you a higher income."
Related: The U.S. Avoided Recession Last Year. What Comes Next?