According to a report from leading economic forecasting consultancy, Oxford Economics the UK inflation outlook has begun to look far more positive.
This is principally due to steep falls in oil and gas prices and the recent softening in core price pressures. Oxford Economics now expects CPI inflation to average 2.1 per cent in 2024, down from its November forecast of 3.1 per cent. Inflation is on track to return to the 2 per cent target in April.
Wholesale gas prices have fallen sharply in recent weeks and the Ofgem energy price cap is on track to fall by 12 per cent in April. Oxford Economics’ commodities team has also cut its forecast for oil prices following recent declines. It expects these two categories to knock more than 1 per cent off CPI inflation in 2024, with the drag in April being as high as 1.6 per cent.
The report also notes that inflation from the service sector has been softer than anticipated in recent months. Though high inflation has pushed up wages, the final part of the loop back to prices hasn’t become properly established. The fall in commodity prices should further weaken the link between wages and prices, reducing the risk that high inflation becomes ingrained.
Even before the recent falls in oil and gas prices, the Bank of England’s inflation forecasts had looked too high. Oxford Economics expects the Band of England to lower its projections significantly in February’s Monetary Policy Report, as it begins to prepare the ground for rate cuts. Lower inflation means it also expects stronger growth in real household incomes and GDP this year.
As recently as last summer, a series of upside surprises for inflation had put the Bank of England on the back foot and triggered a renewed bout of monetary policy tightening. But developments since then have transformed the near-term outlook and Oxford Economics thinks that CPI inflation could be back at 2 per cent as soon as April, 18 months earlier than the Bank of England’s current forecast anticipates. This could be good news for the timing and pace of interest rate cuts.
Oxford Economics is a leader in global economic forecasting and econometric analysis and employs over 300 economists and analysts. Its rigorous economic forecasts are powered by what it claims is the world’s leading fully-integrated global economic model.
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