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Will UK inflation top December’s three-decade high?

Will UK inflation top the three-decade high hit in December?

UK consumer prices are expected to have risen at the same pace in January as they did in December, when they hit a 30-year record of 5.4 per cent.

Economists polled by Reuters forecast the annual pace of inflation to land at 5.4 per cent again when data is released on Wednesday.

UK inflation is “being pushed higher by a triple whammy of higher energy costs, resurgent demand and supply chain issues,” said Susannah Streeter, markets analyst at the financial services company at Hargreaves Lansdown. She added that “with little relief to these pressures yet in sight, consumers are having to get used to a big cost of living squeeze.”

The Bank of England has pushed up interest rates in December and February. Another dramatic surge in prices could herald “a much swifter and steeper rate rises to come,” noted Streeter, especially with energy bills set to soar.

Households face a 54 per cent increase in energy costs in April when Ofgem, the energy regulator, raises its default energy tariff price cap. The £200 rebate announced by the Chancellor won’t reduce households’ utility bills until October.

Prices are growing fast also because previous rises in non-energy costs have forced producers to raise their selling prices, noted Paul Dales, economist at Capital Economics. He thinks that those costs will continue to push up core goods inflation over the coming months, alongside upward pressure on services. “We’re becoming more concerned that stronger wage growth will support services CPI inflation too,” said Dales.

Like many economists and policymakers, Dales revised up his inflation outlook and now expects that CPI inflation will peak at 7.5 per cent in April and will be above the Bank of England target of 2 per cent in 2023 too. Valentina Romei

Did US retail sales recover at start of 2022?

US retail sales are likely to have rebounded in January after a lacklustre end to the holiday season, in a sign that consumers are willing to spend more as the sector grapples with mounting inflation.

Sales were on track to rise 1.6 per cent from December, economists polled by Reuters have forecast. That would be a welcome sign for retailers after a 1.9 per cent decline in sales to close out 2021, the first monthly drop in five months.

Shoppers tapped the brakes on spending late last year after an earlier than usual start to the holiday season. Consumers started purchasing gifts well ahead of Christmas, hoping to avoid a possible supply crunch amid reports of shipping delays. While the rush to shop early boosted sales in the autumn, it left retailers facing a quiet December.

The slowdown also came as Americans faced a sharp rise in prices that continued into the start of 2022. The US consumer price index soared 7.5 per cent year on year in January, its biggest increase in 40 years.

Tiffany Wilding, North American economist at Pimco, warned that companies’ “ability to pass on further price adjustments may be waning” as inflation continues accelerating. Wilding predicted that core retail sales, which strip out categories including fuel and cars, will rise by a modest 0.4 per cent in January.

Still, spending remained robust when compared to last year, according to Mastercard SpendingPulse data that estimated retail sales excluding autos climbed 7.2 per cent last month with strong demand for apparel, luxury goods, jewellery and dining out. Matthew Rocco

Have European consumers become more upbeat despite inflationary pressures?

European consumers have been squeezed by the rising cost of living, and many remain hemmed in by restrictions aimed at containing record coronavirus infections, keeping a lid on spending.

But that could be about to change, after several countries said they would ease pandemic rules.

The latest indication of whether Europeans are becoming more upbeat, in spite of the hit from inflation and the pandemic, will come on Friday when the EU publishes the preliminary findings of its monthly consumer confidence survey.

Sentiment among Europe’s households has “been stagnant or declining in much of Europe since September 2021,” according to Jesse Wheeler, an analyst at Morning Consult. “Once-hopeful consumers have faced the one-two punch of Delta- and Omicron-driven Covid-19 case surges.” 

However, as several countries start to ease pandemic restrictions, there are reasons to believe the European Commission’s consumer confidence index could rise from January’s minus 8.5 points in the eurozone and minus 10 points in the EU.

In recent weeks, Denmark, Sweden and Norway have lifted almost all Covid restrictions, while Austria ended its lockdown on unvaccinated people, Spain and Italy dropped the requirement to wear masks outdoors, and Dutch restaurants and bars reopened.

However, prices continue to rise sharply, reducing people’s spending power after eurozone inflation hit a record of 5.1 per cent in January. There is little sign of relief as escalating tensions between Ukraine and Russia are likely to drive energy costs even higher.

“Consumers in Germany and Italy — both heavily reliant on Russian fuel — are seeing the biggest increases in expectations of higher utility bills,” said Wheeler. Martin Arnold

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