Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “With inflation rising to 3% in January, earlier expectations of a smooth ride towards a lower inflation, lower interest rate environment in 2025 have taken another hit. While still way below the 11% peak seen in 2022, price rises are proving sticky and the Bank of England forecasts a rise to nearly 4% this year before moving back towards its 2% target. This week’s data on wage growth, showing a steep rise in pay in the three months to November, will add further expectation of stubborn inflation in 2025. This points towards the likelihood of a cautious approach to any further interest rate cuts in the months to come, as the Bank looks to balance the need to control inflation and encourage green shoots of economic growth. For borrowers and mortgage holders, the prospect of higher-for-longer interest rates will be frustrating. However, for savers, an extended period of elevated rates provides an opportunity. Easy-access cash savings deals at or just below 5% remain available, but as inflation picks up it will more aggressively erode real returns. Shopping around for the best rates remains crucial - our analysis shows that with inflation at 3%, someone with £10,000 in savings who secures a 5% interest rate could see their savings worth £10,373 in real terms after two years. By contrast, someone settling for a 3% deal would see the real value of their savings fall to £9,982 over the same period. For those comfortable with taking on more risk, investing can provide the potential for higher long-term returns, though it comes with no guarantees. Pensions offer the combined benefits of possible investment growth, employer contributions and tax efficiency - making them a compelling option for long-term savers.”
James Lynch. Investment manager at Aegon Asset Management: “Mixed bag for the inflation numbers out of the UK this morning. Headline Consumer Prices Index (CPI) came in higher than expected at 3.0% against 2.8% expected, but the services component ‘only’ came in at 5.0% against 5.1% expected. According to the Office for National Statistics, the largest upward contributions came from food and transport costs, and goods inflation also came in strong. Given the backdrop this year with the National Insurance Contribution rise and National Living Wage rise coming, how businesses will react to the increase in cost base will be important for Band of England policy rates. The sectors that are going to be impacted are more likely to be low margin, with higher labour costs, such as retail and hospitality - so the increase in food costs in January (which came in at 3.1%) is something to keep an eye on in case this is a start of a trend in 2025. For now, it is enough not to change Bank of England messaging as there is something for everyone in this inflation print and as such don’t expect any change in market rates on the back of this.”
Commenting on the rise in inflation from 2.5% to 3% announced today, Chris Arcari, Head of Capital Markets, Hymans Robertson, says: "Looking further ahead, disinflation in energy, foods and goods prices is largely in the rear-view mirror and inflation is expected to continue to rise, with consensus forecasts suggesting it will reach 3.2% year-on-year by September 2025. While much of the forthcoming rise in inflation is expected to owe to temporary factors, such as energy prices, strong service sector and core inflation is likely to keep the Bank of England (BoE) cautious.
“Indeed, labour market data released on the 18th February showed average weekly earnings grew 5.9% year-on-year in the 3 months to end December. Even allowing for potentially optimistic productivity growth assumptions, wage growth is running well above a level consistent with a sustainable return to the BoE's 2% target.”
Sarah Pennells, Consumer Finance Specialist at Royal London said: “December marked only a temporary reprieve from rising inflation and while the cost of living crisis may have eased, many people are still facing tough times financially. Royal London cost of living research shows that almost nine out of ten adults are worried about rising energy costs and just over eight in ten about higher food bills. If inflation continues rising as forecast this year, it could put the most vulnerable at further financial risk. One in ten adults currently say they couldn’t afford any unexpected bill - no matter how small - from either their savings or income. With wholesale gas prices recently reaching their highest level for two years, many will be concerned about consumer energy prices and this inflation data will only increase anxiety about everyday costs such as energy bills.”
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