Despite a December rise, inflation is expected “to continue falling this year” says Yael Selfin, Chief Economist at KPMG UK.
The KPMG UK team noted that the expected fall in the energy price cap in April “could see inflation returning to target by spring. Nevertheless, disruptions in the Red Sea impacting supply chains could cause further increases in goods prices adding uncertainty to the economic outlook.”
The KPMG UK update also mentioned that the anticipated “overall improvement in the outlook for inflation, coupled with the slowdown in the domestic economy, will likely put the Bank of England in a position to begin cutting interest rates from the second half of the year, potentially lowering rates by 100 basis points in 2024.”
The KPMG UK team added that December’s inflation “rose slightly to 4%, driven by higher tobacco duties and persistence in services inflation.”
Encouragingly however, food price increases “continued to moderate with further slowdowns likely to lower headline inflation this year.”
KPMG UK also commented on the latest labor market figures.
They pointed out that the unique circumstances which “fueled pay growth, including strong demand for workers and higher pay demands to keep pace with the sharp rise in the cost-of-living, have receded in recent months.”
Pay growth fell for a third month in a row, “pointing to easing pressure.”
They added that the marked slowdown in pay growth “will ease the Bank of England’s concerns of a potential wage-price spiral, which could lead to faster falls in inflation.”
Vacancies are also expected “to fall further, which could see pay growth normalising towards levels consistent with the inflation target by the end of the year. This will likely bolster the case for interest rate cuts later this year.”
The update further noted that pay growth “fell to 6.6% in November, down from 7.2% a month earlier as the labor market continued to cool.”
The KPMG UK report concluded that “while unemployment remained relatively low at 4.2%, it is expected to continue trending upwards this year as economic activity remains subdued.”