The EY ITEM Club expects inflation to steadily fall back through 2023, although is likely to be above the 2% target at the end of the year. The Monetary Policy Committee (MPC) is probably close to the end of its tightening cycle.
EY ITEM Club Winter Forecast published on 23 January.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Consumer Price Index (CPI) inflation fell to 10.5% in December, from 10.7% in November. The primary driver was a 5.1% fall in petrol prices between November and December 2022, versus no change in the same period in 2021. Meanwhile core inflation remained unchanged at 6.3%.
“The EY ITEM Club continues to think that inflation likely peaked at 11.1% in October last year. Large base effects are set to come into play for the energy component of inflation which will more than offset April's 20% rise in the Energy Price Guarantee (EPG). The recent significant fall in energy futures prices also suggests that the energy price cap will fall below the EPG from July, reinforcing the downward pressure from the energy component. Food and fuel price inflation are also likely to ease. However, the descent in CPI inflation will be slowed by the continued pass through of last year's sterling depreciation and higher energy costs for businesses.
“The Monetary Policy Committee (MPC) significantly increased interest rates throughout 2022, reflecting concerns that very high inflation combined with a tight labour market, could create the conditions for a wage-price spiral to develop. These concerns should be starting to recede given that inflation has passed its peak and labour demand continues to soften, so the Bank of England is likely close to the end of its tightening cycle. The EY ITEM Club expects Bank Rate to peak at 4% in Q1. And given the prospect of inflation falling through 2023 and into next year, the MPC may be mulling rate cuts by the end of 2023.”