Inflation is past peak… but fall will be ‘bumpy’

Inflation is likely to have peaked and price increases should slow for the rest of the year, experts say.

Falling gasoline costs are expected to be the main driver behind a predicted drop in the consumer price index (CPI) when December’s numbers are released this week.

The overall CPI, which peaked at 11.1 percent in October, may have fallen to just over 10 percent. That’s still nearly four decades high, but at least it’s moving in the right direction, economists say.

This should encourage the Bank of England’s Monetary Policy Committee to temper further increases in key interest rates, currently at 3.5 per cent.

“A continued downward trend should help convince the MPC that it can start raising bank rates in smaller increments than December’s half percentage point,” said Philip Shaw of the Investec group.

But economists warn it will take time to bring inflation under control and meet the bank’s 2 percent target.

“We should now be on a gradual but bumpy road to the target, which we believe will take at least 18 months,” Deutsche Bank’s Sanjay Raja said. “The recent fall in gas prices should help us move a little faster if market prices continue or fall further in the coming quarters.”

Deutsche Bank believes the recent fall in wholesale gas prices to pre-Russian invasion levels of Ukraine will reduce inflation by a further three percentage points.

That would result in household bills coming under the government’s £3,000 energy price guarantee in June, saving the Treasury at least £10bn in aid payments.