A steep fall in energy and food prices is likely to lead to inflation in the UK dropping to about 4 per cent by the end of 2023, according to Steven Bell, EMEA chief economist at Columbia Threadneedle Investments.
Bell said he has revised upwards his expectation for UK inflation to 4 per cent from 3 per cent by the end of 2023, but either figure would represent a sharp drop from the present level of more than 8 per cent.
The main reason Bell feels inflation will drop is that energy prices will show a fall of 20 per cent year on year in October to reflect the recent drop in wholesale energy prices.
Bell believes this will feed through to sharply lower food prices, but added that another significant factor may be the performance of sterling relative to peer currencies.
He said: “Sterling fell quite a lot in 2022 and there was a lag in terms of the impact of this on prices, but that will fall out of the data soon, and sterling was strong at the start of this year, and that may start to have a small positive effect.”
But while he expects inflation to fall, Bell said he does not anticipate this will significantly alter the path of interest rate rises presently being embarked upon by the Bank of England, as he feels the central bank will continue to respond as long as wages are rising.
Gero Jung, chief economist at Mirabaud Asset Management, is another who believes that inflation in developed markets will fall “sharply” later this year, though he feels the UK may continue to have higher inflation than other European countries.
His reason for expecting inflation to fall is similar to Bell’s, with the effects of higher energy prices dropping out of the data.
He is puzzled by the persistence of labour shortages in most economies, as he expected many of those who dropped out of the labour force to have re-entered by now. He feels inflation may be higher in the UK than in some other countries as he believes the labour shortages may persist.
He said input cost inflation, that is the costs of making goods, has fallen sharply over the past year and this will start to feed through to consumer prices later this year.
In addition, Bell is relatively optimistic about the short-term outlook for the UK economy. He said uncertainty around energy prices meant many consumers didn’t dip into their pandemic era savings in 2022, and so have those now.
Instead he believes that it is the US where a mild recession will happen this year, as those consumers have “exhausted” their pandemic savings and this is causing consumer confidence to decline.
Jung is more cautious on the UK as he says recent data indicates consumer spending was “flat” and that the meagre level of economic growth came from an increased level of business investment, which is likely the consequence of a tax break, and so will be temporary in nature.
Bell believes there will be a general sell-off in risk assets if the US enters recession, and that would be expected to benefit government bonds.
Guy Foster, chief strategist at RBC Brewin Dolphin, is another who believes inflation may be reverting to normal levels.
His view is that some of the supply chain issues which have pushed prices up are now ending, while commodity prices are generally lower this quarter than they were the quarter before.
He added: "One of the reasons UK inflation has been slow to fall is because the UK’s price cap system effectively delayed both the increase and subsequent decline in energy prices. At current gas prices, this should mean the annual rate of inflation slows quickly towards the end of the year."
david.thorpe@ft.com
