On a monthly basis, CPI increased by 0.5% in December. CPIH inflation, which includes owner occupiers’ housing costs, rose by 4.8% over the year. Household services, which include gas and electricity, as well as petrol, were among the biggest contributors to the rise. Economists now predict that "multiple interest rate rises" may be necessary in the year ahead.
Back to the 90s for inflation, with CPI hitting 5.4% in the year to December, the highest level since March 1992. When inflation was last this high, John Major was Prime Minister the Bank of England is vindicated in its decision to hike rates in December in the face of Omicron uncertainty, but it could still go either way when the MPC meets in early February. The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost of living crisis that is set to squeeze household finances over a difficult winter period. It’s not just the cost of living that is increasing, so is the cost of going to work, and wage increases may not be enough to cover the cost of returning to normality. The ONS published figures showing wage growth of 3.8% yesterday, so workers are facing a real terms pay decline of 1.6%. Taken together, there is a very real concern that in-work poverty is growing.
It seems like madness now that only a year ago we were pondering whether the Bank of England would take rates below zero, but even with inflation hitting 5.4%, things will get worse before they get better. Inflation is expected to peak in the second quarter before starting to settle down in the latter stages of 2022 and early 2023.
We are at a historical juncture for markets and developed economies, which are battling with inflation numbers not seen for decades outside emerging markets. Investors are faced with a delicate market environment at the moment, and they will need to watch the data and markets very closely and allocate accordingly. Diversification, active management and prudency are the key tools for investors to use now.