UK stocks will almost certainly fall and bond yields rise if fresh inflation figures for the month of December come in higher than expected on Wednesday. The current consensus forecast is for the CPI rate to be unchanged month on month at 2.6%.
Published by the Office for National Statistics, Wednesday’s much-anticipated data will directly impact the Bank of England’s willingness to cut interest rates. It’s the last inflation print until the Bank’s first meeting of 2025, at which it is expected to cut rates.
Markets entered the year expecting around two or more interest rate cuts by the Bank, but higher inflation could further entrench the central bank’s cautious approach.
What is the UK’s Current Inflation Rate?
As of December’s data release for the 12 months to the end of November 2024, UK inflation is currently at 2.6%—as measured by the Consumer Price Index, or CPI.
On Wednesday, when the ONS reports December’s data, which includes the festive period, markets are expecting a repeat of those figures, according to FactSet consensus.
The Bank of England’s inflation target is 2%, so a repeat of the 2.6% figure would further confirm sticky inflation embedded in the UK economy.
Core inflation, a measure of price rises that excludes more volatile energy and food costs, is expected to be 3.6%. If that is also correct, it would be 0.1% higher than November’s core inflation reading of 3.5%.
The fresh data also comes amid recent turmoil in the UK’s bond markets, where gilts sold off and yields rose to levels not seen since 2008.
“UK government bonds have been punished and sold off more so than the rest of the world,” says Oliver Faizallah, head of fixed income research at Charles Stanley.
“This seems to be due to concerns around sticky inflation leading markets to believe we’ll have higher rates for longer. Market views on BoE cuts are more bearish than the BoE’s, and the market is now looking at only 40 basis points of rate cuts for the year versus 60bps in December.
“The market will continue to pay close attention to the data, [and] CPI released this week will be watched very closely.”
Why is UK Inflation Rising?
Commentators will be focused on sticky services inflation on Wednesday.
“Markets will be looking at services inflation, which has potential to edge higher on the back of an increase in the national living wage,” Faizallah says.
“There is also the view that a higher living wage may result in a drop in hiring, higher unemployment and a subsequent drop in consumer confidence and inflation.”
Services inflation can be viewed through several different lenses.
Firstly, through what the ONS calls “Core CPIH”, an offshoot of CPI that accounts for owner occupiers’ housing costs, including household services.
At its update for November, the ONS said the largest upwards contributions to CPIH and headline CPI came from transport and rising petrol and diesel costs, but there was also a significant uplift from housing and housing services. (It’s worth noting that the media reports the headline CPI figure, but the ONS prefers the CPIH number. Last month the headline CPI rate was 2.6%, whereas CPIH was 3.5%.)
The UK’s services-based and retail economy could also make other significant contributions to rising prices. It is thought several of the measures included in the Labour government’s first Budget of Oct. 30 last year will be inflationary, including a higher national living wage and higher employer national insurance costs.
This will affect businesses up and down the country.
From Apr. 1 this year, 3.5 million workers aged over 21 will receive £12.21 per hour, a 6.7% increase from £11.44 per hour. Those aged 18-20 will get £10 per hour, up £1.40 from £8.60 per hour. The new rates are the largest increase on record for those aged 18-20. It is also possible the 18-20 rates and the 21+ rates will be merged in future.
Business analysts have also been watching closely to see the reaction of the UK’s various retail, services, and manufacturing brands to the government’s increase to employer national insurance costs.
The Bank of England’s own governor, Andrew Bailey, has already said the planned increase, which will be effective from Apr. 1 this year, is potentially the “biggest issue” facing the economy.
Will UK Inflation Continue to Rise?
Some employers have already said they are passing on the costs of the tax increase to consumers in the form of higher prices.
At the start of the year, high street retailer Next NXT, which was a strong performer on the FTSE 100 in 2024, said it would raise prices on some of its clothing lines to offset the cost of this policy.
A survey of nearly 5,000 businesses by the British Chambers of Commerce conducted after the October Budget also showed that more than half of respondents were planning to increase their prices in the first three months of the year.
Some 63% of businesses included in the survey said tax, including national insurance, was a concern. Only 20% of businesses had increased investment in the final quarter of 2024, while 24% had decreased the amount they pour into new projects.
For economists, this raises the worrying question of “stagflation”—a portmanteau describing stagnating economic growth and rising prices.
When the latest gross domestic product figures for the UK were published in December, covering the month of October 2024, there was a 0.1% decline in the figures, versus market expectations of 0.1% growth.
Beyond causing a political issue for a government intent on growing the UK economy, stalling growth would represent a continuation of a trend seen since the pandemic: of low-growth and higher prices.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
