UK CPI Preview: Forecasts from three major banks, inflation could slow further

We expect another soft report and see headline falling a tick to 3.8% YoY and core declining to 4.9% YoY. Moreover, services inflation will likely fall to 6.0% YoY. We continue to look for the BoE to start cutting Bank Rate in May, but another weak inflation report will make a dovish pivot at the February meeting even easier to justify.

UK services inflation looks set to come in at 6.1%, well below where the BoE had forecast it back in its November policy report. Along with wage growth, which has also finally started to moderate, these are the key metrics upon which the Bank has signalled it will base its rate cut decisions. For now though, 6%+ services CPI is still too high and it’s likely to stay in this region into the first couple of months of 2024. But things will start to change as we head towards summer. Thanks to moderating food and consumer goods inflation, as well as lower petrol prices, headline inflation is set to fall to 1.6% in May on our current forecasts. Services inflation should be down to 4% by the summer too. Assuming we get a fiscal boost in March – we forecast the Chancellor’s £13bn headroom will double at the next budget, enabling tax cuts – the BoE may be tempted to wait a little longer before cutting rates. We’re forecasting an August cut, though faster-than-expected declines in services CPI and/or wage growth could conceivably see that date come forward.

Lower food and goods inflation should contribute to headline inflation having fell by 0.2pp to 3.7% in December, with core easing by 0.3pp to 4.8%. Looking ahead, the continued easing in pay growth and supply shocks should drag inflation below 2% in April. The recent easing in wholesale gas prices has reaffirmed our view that headline inflation may remain below 2% from April. Having said this, aside from a resilient labour market keeping pay sticky, the recent Red Sea tensions causing shipping costs from China to Europe to rise by 180% since 1H23 and increased border checks for food in January could see stronger inflation than we currently forecast.