Target practice at the Bank of England

Today’s UK Consumer Price Inflation for January, steady at an annual rate of 4%, may still seem some way from the Bank of England’s target rate of 2%.

However, there is a strong likelihood that this target will be met in just two months’ time when the end March data are released on 17 April.

“…annual UK CPI will fall to 2.8% next month and to exactly 2% the month after.”

Here’s why: inflation was running quite hot in the first quarter of 2023, so the base effects (i.e. a high base level of inflation 12 months ago) will begin to enter the 12 month inflation statistic from next month. Even if monthly levels of inflation remain unchanged during February and March this year, annual UK CPI will fall to 2.8% next month and to exactly 2% the month after.

Interestingly, we actually saw prices fall by 0.6% in the month of January, so if that rate of decline were to be maintained over the next two months, then the annual inflation rate would drop to just 0.8% at the April release date.

“…this is pointing to the Bank of England having to come off the fence by starting to cut interest rates quite soon.”

All in all, this is pointing to the Bank of England having to come off the fence by starting to cut interest rates quite soon. This should be good for bonds, where we have increased exposure, and should also offer support for equities. It will probably result in a weaker pound, which may help our overseas investments. It may still not be enough, however, to rescue the Conservatives and Rishi Sunak at the polls.

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