As energy prices retreat, inflation is finally climbing down from its dizzying heights. It’s fallen back to 10.5% in the UK and 6.5% in the US, and is retreating more rapidly than expected in the Eurozone.
Investors have cheered the direction of travel for prices, and the FTSE 100 has been flirting with record highs. They’ve also been buoyed by China’s reopening. This has fuelled the expectation that supply chain problems, which have caused goods shortages, will ease further.
Gas prices have retreated to levels not seen since the end of 2021, and crude oil has settled back at the range it was before Russia invaded Ukraine.
However, energy prices have proved to be volatile and the lack of investment in the industry is leading to expectations that they’ll remain relatively high for the foreseeable future.
Is sticky inflation in store?
With elevated energy prices looking likely to linger, there’s also the risk the tight jobs market and relentless food price rises will mean inflation stays stickier for longer.
Food prices continued their upwards march in December. Fresh produce in particular proved much more expensive, rising 15% compared to a year ago. However, there are warnings from industry bosses that prices will take considerable time to come down.
The latest jobs snapshot shows that the labour market is still tight – and wage growth is particularly strong in the private sector, increasing by 7.2% in the three months to November compared to a year earlier.
The disparity with public sector pay, which rose just 3.3% in the same period, is increasingly stark. This won’t help waves of industrial unrest. But it also could mean companies will pass on those higher wage costs through more price rises. If this happens, it could add to the inflationary spiral. The UK looks likely to have escaped a recession for now. However, the expected stagnant or shrinking economy in the months to come could lead to job losses and is expected to limit future wage rises. But right now, the tight labour market is still likely to be a cause of concern for Bank of England policymakers.
They’re not alone in worrying that the falls we’ve seen in the headline rates of inflation aren’t enough to stop the painful price spiral in its tracks.
The European Central Bank has warned that economic growth needs to be held back to make a significant dent in inflation and bring it back to the 2% target.
There’s still a long way to go, and it looks like investors should brace for further rate rises from central banks.