Economic Monitor: Outlook for inflation improves
The Bank of England (BoE), yesterday, voted to keep interest rates unchanged at 5.25%, stressing the need to keep rates elevated until inflation sustainably returns to the 2% target. Nonetheless, the economic growth outlook improved marginally, and 40% lower gas prices since the end of 2023 are feeding through into a rosier inflation outlook.
Consumer confidence continued its improvement and perceptions surrounding economic conditions are finally escaping negative territory. Service providers report improving demand as a result of lower borrowing costs, suggestive of improving momentum. However, business budgets remain constrained by elevated cost pressures, particularly labour costs.
Inflation is now forecast by the BoE to temporarily return to the 2% target in Q2 2024, due to lower energy bills, before increasing slightly to 2.4% by year-end as the contribution of energy bills to the Consumer Price Index (CPI) becomes less negative. It then sustainably returns to target during the middle of 2025. However, upside risks remain in play, with a close to tripling in shipping costs, and an uncertain future trajectory of oil prices that could jeopardise a smooth decline in the CPI.