The Prime Minister has met his pledge of halving inflation, but we’re not out of the woods yet.
Source: ONS, Ofgem.
In the first week of 2023, the then still new Prime Minister, Rishi Sunak, set out “five immediate priorities” for his government. The first of these was: “We will halve inflation this year to ease the cost of living and give people financial security.” At the time, the latest published inflation figure was for November 2022, which showed the annual CPI figure at 10.7%. The December 2022 figure, published in mid-January, dropped slightly to 10.5%. Whether Mr Sunak’s goal was 5.35%, 5.25% or some other similar number, the target appeared a strange choice for pole position because:
• The government has little control over inflation, a task that it primarily delegates to the Bank of England; and
• The Treasury’s own comparison of independent economic forecasts showed the average forecast for the inflation in the final quarter of 2023 to be 5.0%, making the pledge seem little more an agreement with consensus opinion.
The notion that the pledge was a slam dunk initially faded as price (and earnings) inflation proved more tenacious than expected. However, by late summer, major help arrived in the decision of Ofgem, the energy regulator, to pitch the October to December 2023 utility price cap at £1,834. For the final quarter of 2022, the cap was supplanted by the Energy Price Guarantee of £2,500. The 27% fall year-on-year in October 2023 compares with a 106% increase in the year to October 2022, a major contributor to that year’s double digit inflation rate.
However, inflation falling to 4.6% does not mean that prices generally are falling – the drop in energy costs over the last twelve months is the exception that proves the rule. Overall, prices in October 2023 are now more than a fifth above the level in January 2021. That is a significant jump in less than three years and one that needs to be borne in mind as 2024 gets underway.
Unless you have reviewed your financial planning very recently, your plans will almost certainly need adjustment to account for current price levels.