'4%. We'll take that' - in an election year, this week's economic data matters

ITV News' Economics Editor Joel Hills reports on the latest economic findings

There’s a lot hanging on the outcome of the economic data which is published this week.

Not least politically.

Yesterday, we learned that pay in the UK continues to grow at a pace which will improve living standards but concern the Bank of England.

Today, we learned that the headline annual rate of inflation held steady in January (it had been expected to edge up).

And tomorrow we find out if the British economy entered recession at the end of last year.

In an election year, the results of all of the above will be seized upon by politicians and, in all likelihood, used to tell different stories.

According to the latest data published by the Office for National Statistics on Wednesday morning, consumer prices in the UK were 4% higher last month than in January last year. 

The headline rate of inflation was unchanged from December. 

“Inflation never falls in straight line,” the Chancellor said this morning, which has the merit of being true.

“Although it's welcome that (inflation) hasn't gone up today, it is still double the target level of 2%. And we're not going to be able to relieve pressure on families until we hit that target And the Bank of England feels able to reduce interest rates.”

I was at Downing Street this morning to interview Jeremy Hunt on behalf of all the UK broadcasters.

The chancellor’s answers were cautiously optimistic but behind the scenes there was a sense of relief.

Shortly after I finished the “pool” interview, a political aide swept into the corridor outside.

Unaware a journalist was within earshot, they shouted “great result. 4%. We’ll take that!”

This is an election year.

Inflation more than halved over the course of 2023, meeting the PM's target. Credit: PA Graphics

Inflation in the UK has been fading (a year ago, the headline rate was 10.1%) and there are good reasons to expect it to fade further in the months to come.

The international market price of natural gas has fallen back to near pre-Covid levels.

Household energy bills are set to drop sharply when the OFGEM price cap is reset in April and drop  again in July if the market price remains where it is.

Annual goods price inflation is below 2%, despite the attacks on shipping which continue in the Red Sea.

British manufacturers say that the cost of their raw materials continues to fall.

The Bank of England thinks there’s a good chance that the headline rate of inflation will have fallen below its 2% target by May.

Many independent forecasters agree.

If they are right, then in the summer the pressure on the Bank to cut interest rates is likely to grow - not least from some politicians, not least in an election year. 

Whether the Bank cuts or not will depend on what is happening to inflation in the Services sector of the economy (which is currently running at 6.5%) and pay (currently growing at close to 6% a year). 

The Bank worries there’s a risk that companies are passing the cost of higher wage bills on to consumers in the form of higher prices.

One final thought. Let us remind ourselves that lower inflation does not mean lower prices.

Food inflation is easing but food prices are 7% higher than a year ago and 22% higher than in January 2022.

The last word goes to Joseph Rowntree Foundation.

“Families on the lowest incomes won’t be debating what it means for inflation to remain at 4%. They’ll be debating whether to turn the heating on, or to replace their shoes that have holes in or to skip another meal because they can’t afford it.”

In an election year, it’s a reminder that price stability matters.

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