Personal Finance

When will inflation go down in UK? Bank of England gives rate hint

UK inflation is set to fall rapidly, the Bank of England chief has predicted, as new figures show the prices that are already slowing.

Bank of England Governor Andrew Bailey also hinted that predictions suggesting interest rates will peak at 4.5% are now more in line with the Bank's beliefs.

Although he would not give his own forecast, or endorse the 4.5% prediction outright, he did give sound optimistic about when the UK may reach the peak of the cost of living crisis.

His comments come as new inflation figures for December 2022 are released.

Data from the Office for National Statistics (ONS) showed the Consumer Prices Index had slowed from a rise of 10.7% in the year to November 2022 to 10.5% in the year to December 2022.

In an interview with Media Wales he said the slight decline in inflation was expected and suggested “the beginning of a sign that a corner has been turned”.

He said: “What we think is the most likely outcome is that it will fall quite rapidly this year, probably starting in the late spring and that has a lot to do with energy pricing.

“There was a sort of locked-in level of energy prices over the winter, but we expect it to fall quite rapidly after that.”

Although the drop in inflation doesn't mean prices are falling, it does show prices are not rising as fast as they were.

Food and non-alcoholic drinks were still rising fastest, with a 16.9% rise year-on-year and a 1.6% rise month-on-month. Housing and household services was the second worst category for inflation year-on-year, due to high energy prices. But the Energy Price Guarantee meant increases were relatively steady month-on-month.

Restaurant and hotel prices also rose 11.4% in the year to December, up from 10.2% in November – the highest rate since 1991.

Alcohol and tobacco, clothing and footwear, communication, and transport (largely due to motor fuel) were all rising slower than previously, offsetting the large rises in food and energy.

Recreation and culture was also down, dropping from 5.3% for the year to November to 4.8% in December. This was largely from games, toys and hobbies.

Mr Bailey said inflation would stop looking so stark through the year because prices will be compared to the highs they are already at, rather than the lows when the inflation spike began. The drop in wholesale energy prices will also start to feed into customers at some point. This, he said, “does mean there is more optimism now”.

But the UK will enter a shallow but prolonged recession after the economy “went off a cliff”, he said.

The UK markets were sent into turmoil last year after ex-Chancellor under Liz Truss, Kwasi Kwarteng, issued his tax-cutting, unfunded mini-budget.

The Bank of England had already been raising interest rates since December 2021 but took measures to rapidly raise the base rate in the second half of 2022.

Markets originally predicted interest rates could peak at more than 6% but this has since come down. Talking of where interest rates could peak, Mr Bailey said: "If you go back to the height of that period, the peak of what the market thought we were going to get to was over 6%, but the time we did our forecast in November it was 5.2%, it is now down to 4.5%. Now I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being in our view rather out of line.”


Helen Barnett

Helen is a journalist, editor and copywriter with 15 years' experience writing across print and digital publications. She previously edited the Daily Express website and has won awards as a reporter. Read more here.


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