Inflation figures dominate the market today. The TPP midweek update.

It’s all about inflation

The first two days of this week were really just treading water while we waited for the all-important inflation figures on Wednesday.

The first to kick off was UK inflation at 7am GMT. This went as well as could have been hoped but despite what you might read in the papers, inflation was higher in December than it was in November by more than the target rate. The month-over-month figure for December came in at 0.3%, meaning quite simply that prices were 0.3% higher than in November.

Inflation didn’t fall but the speed of increase did decline and it was also slightly less than expected. This is good news for the Bank of England and the government.

The reason the headline figure is reported lower is due to the fact that last December the monthly increase was 0.4%, compared to this December of 0.3%, and therefore an annualised decrease of 0.1%.

It is important to remember that inflation is measured every month. The yearly figure that is reported is taken from 12 monthly figures. It sounds simple, and it is, but the media will only focus on the headline annual figure and won’t ever explain how it actually works.

As you can see from the chart below, inflation is more volatile than you might realise. The Bank of England’s target over the course of the year is 2%. This means that the average monthly reading needs to average around 0.17% for the Bank to hit its target. Some months will be higher, some will be lower, but the trends are easier to spot if you dig a little deeper.

Here are the last 13 data points for monthly CPI. As one December drops off, the new one is used to calculate the yearly figure and the last 12 figures make the headline number.

As an aside, you will hear in the press today how ‘economists still expect inflation to reaccelerate in the months ahead,’ (The Financial Times). This isn’t a magic prediction of future prices, but merely common sense due to the fact that last January the monthly inflation figure was negative at -0.6% - and this will drop off the annual number next month. Unless this January also sees a fall of -0.6%, then inflation will increase – it’s that simple.

So, onto the finer details of the report. Here is how each of the main groups of goods and services contributed to the change in the annual CPI inflation rate between November and December 2024.

The fall in the rate into December 2024 reflected downward contributions from five divisions, partially offset by an upward contribution from four divisions. The largest downward contributions came from restaurants and hotels, alcohol and tobacco, and clothing and footwear.

Restaurants and hotels

The annual inflation rate for restaurants and hotels was 3.4% in December 2024. This is down from 4.0% in November and is the lowest annual rate since July 2021. On a monthly basis, prices fell by 0.1%, compared with a rise of 0.5% a year ago.

Alcohol and Tobacco

Prices in the alcohol and tobacco division fell by 0.2% between November and December 2024, compared with a rise of 1.2% a year ago. On an annual basis, prices rose by 5.3% in the year to December 2024. This is down from a rise of 6.8% in the year to November.  

Food and non-alcoholic beverages

Food and non-alcoholic beverage prices rose by 2.0% in the year to December, unchanged from November 2024. The annual rate of 2.0% is down from a recent high of 19.2% in March 2023, which was the highest annual rate for over 45 years.

Transport

Overall prices in the transport division fell by 0.6% in the year to December 2024, compared with a fall of 1.1% in the year to November. On a monthly basis, prices rose by 1.0% in December 2024, up from 0.6% a year ago.

The change in the annual rate was mainly the result of upward effects from motor fuels and second-hand cars, partially offset by a downward effect from airfares.

Overall, this was positive news for the UK and shows that inflation is still under control; even if it isn’t falling, it isn’t rising as much as it was, and the consistent figures should provide some comfort to the Bank of England.

On the back of the release, the FTSE 100 climbed 0.77% to 8,264 as of midday. The more domestic focussed FTSE 250 was up 1.42% at 20,047. The latter has taken a pounding over the past 6 months on the back of the punishing budget. The index has dropped 5.2% since the middle of October.

The pound was unchanged against the dollar and up 0.08% against the Euro. While the weakening pound has stolen the currency headlines in the UK, the truth is it is only down -3.33% over the last 12 months compared to a decline of 5.25% for the Euro and 5.55% for the overall dollar index which is a weighted average taken from the Euro, Yen, Canadian dollar, British Pound, Swedish krona and Swiss franc.

The currency situation is one of a strong dollar rather than a particularly weak pound.

Talking of inflation: The US has just released their figure. The headline is driving equity markets forward (at the moment), as it was pretty much on the money.

This is one of the biggest numbers in the economic calendar right now. When the US sneezes, the rest of the world catches a cold and that is never more true than in global financial markets.  

The market was expecting a monthly change of 0.3% meaning a year-over-year rise of 2.9%. The options market was suggesting that anything either side of this will create waves in the equity market and we’re sure it will. A lower number would be welcomed by the Federal Reserve and potentially bring another rate cut into play, but a higher number may have investors running for the hills.

As we look at US stocks right now the reaction is a positive one. However, as with all data, markets movements can quickly change.

It could be an interesting day ahead, and one that many of our strategies will be looking to take advantage of if an opportunity arises.

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Have a great rest of the week, and do let us know if you have any questions.