Inflation like 'stubborn toddler' - what rates and inflation double whammy means just before Christmas

It’s a double whammy that none of us wanted in the final countdown to Christmas. News that UK inflation has risen to its highest level since March is set to be followed by a freeze on interest rates when millions of borrowers and businesses had been hoping for some financial respite to end a challenging year.

The latest official figures show that the annual rate of consumer prices index (CPI) inflation rose to 2.6 per cent in November, up from 2.3 per cent the previous month and above both the Bank of England’s 2 per cent target rate and September’s surprise low of 1.7 per cent. The Office for National Statistics (ONS) noted that prices of motor fuel and clothing had increased this year when they had fallen back in the same month last year. This was partially offset by air fares, which traditionally dip at this time of year, but saw their largest drop in November since records began at the start of this century. Meanwhile, the rate of CPI inflation for food and non-alcoholic drinks, alcohol and tobacco, clothing and footwear all edged higher last month.

An upward inflation trajectory is likely to reinforce expectations among economists that central bank policymakers will opt to keep interest rates on hold at 4.75 per cent this week, maintaining pressure on mortgage holders and borrowers who have been hoping for a further reduction in borrowing costs.

Analysts say food and drink inflation, added to fuel rises, have driven this bump in inflation. | PA / Scotsman / Canva

Chancellor Rachel Reeves has conceded that there is “more to do” to combat cost-of-living pressures, though much of that is beyond her direct control. The TUC is demanding that the Bank of England cut interest rates “to protect families and businesses” - a plea that is likely to fall on deaf ears over on Threadneedle Street, at least for the time being.

Rate-setters will be concerned at the current price stickiness and, in particular, that core CPI (excluding energy, food, alcohol and tobacco) nudged up to 3.5 per cent last month, from 3.3 per cent in October. On the other hand, services inflation, which has been a particular area of concern, was unchanged last month at 5 per cent. That services data tracks key prices across industries from hospitality and culture, to property, financial services and education.

With a pre-Christmas cut in interest rate off the cards, attention will turn to the new year and the likely direction of travel as a number of inflationary pressures feed through. Economists, as always, are divided on when the next cut will take place and the extent of any monetary easing over the coming 12 months.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said inflation was “back on the see-saw”, amid concerns that price increases may intensify.

The Chancellor of the Exchequer Rachel Reeves speaks to the media. PIC: Peter Byrne/PA Wire

“There’s the risk that prices could climb higher as employers try to mitigate the effect of increases in national insurance contributions and the minimum wage next year,” she noted. “But on the other hand, it could prompt slower wage growth further down the line. We may be off the rollercoaster ride, but inflation is still behaving like a stubborn toddler, resisting attempts to coax it down from uncomfortable heights.’’

Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners, said the Bank of England’s monetary policy committee will be wary that services inflation becomes stuck at an elevated level.

“Stubborn inflation may lead the BoE into a more modest rate-cutting cycle,” he warned. “So, it looks like it will skip the opportunity to cut interest rates [this week] and it’s probable that the next BoE interest rate cuts will come at the February 6 and May 8 meetings.”

It’s a double whammy that none of us wanted in the final countdown to Christmas.

The inflation figures came a day after ONS data showed that wage growth had risen by more than expected in the three months to October. Regular UK earnings growth increased to an annual rate of 5.2 per cent in the three months to October, up from a revised 4.9 per cent in the previous three months and the first time it has risen since August last year. Earnings growth also outstripped inflation by 3 per cent in the three months to October, once the CPI rate of inflation is taken into account.

Danni Hewson, head of financial analysis at investment firm AJ Bell, said: “Households really won’t care that at 2.6 per cent inflation is significantly lower than the levels we all experienced at the height of the cost-of-living crisis, all they’ll really care about is that prices are still rising faster than any of us would like. It means less money in our pockets and even with average wage growth still nicely overshooting that figure, cumulatively we’re all still reeling from the impact the last couple of years has had on our finances.”

She added: “A few weeks ago, [Bank of England governor] Andrew Bailey suggested that four cuts looked likely over the next 12 months, taking the base rate from 4.75 per cent to 3.75 per cent. Looking today, more than a third believe it will take until the August meeting for the MPC to pull out two quarter percentage point cuts.

“Higher-for-longer borrowing costs are just another potential pitfall businesses are having to factor into their planning, and higher-for-longer rates aren’t exactly the best medicine for supercharged economic growth.”

It comes as new research from Charles Stanley Direct shows that self-directed investors - dubbed DIY investors, in that they actively choose their own investments - expect that interest rates will fall to an average of 3.18 per cent within six months’ time.