Game On with inflation

Game On with inflation

As the dark days of winter recede and Spring is sprung, central bankers have been scurrying out of their burrows to share the good news that the time of high interest rates is nearing its end. And, waiting just over the horizon is a warm glow of interest rate cuts. One after another, the US Federal Reserve’s Jay Powell, the ECB’s Christine Lagarde and the Bank of England’s Andrew Bailey, have opened up on how the Fed “is not far” from cutting rates, ECB officials back a June rate cut but are “keeping the door open for April,” and UK investor’s bets on rate cuts this year are “not unreasonable.123” All welcome news. For the moment, however, we will focus our attention, at home, on the UK.

On 14 February, Valentine’s Day in the UK, the Office for National Statistics reported that the Consumer Price Index (CPI) rose by 4.0% in the 12 months to January 2024, holding steady at the same rate as in December 2023. That rate, 4.0%, is still above the BoE’s target, 2%, but it’s a dramatic improvement on the 10.1% rate of a year ago. Even before that data was published Governor Bailey speaking in February, shortly after a BoE meeting, said “inflation could ease to its 2% target within a few months.” It’s a view we share. It could arrive as soon as April, and potentially fall below 2%.

Supporting that prognosis, we’d cite a number of forthcoming events. From 1 April 2024 (to 30 June) OFGEM’s price cap will fall 12%; the price for energy a typical household, who use electricity and gas and pays by Direct Debit, will go down to £1,690 per year. This is £238 per year lower than the price cap set between 1 January to 31 March 2024 (£1,928)4. A similar fall is not out of the question in July. Staying with energy, the 6 March Budget saw the Chancellor freeze fuel duty again for another 12 months5. Duty is charged at 52.95p a litre, an amount that was cut by 5p in 2022 by the then chancellor, Rishi Sunak, after prices spiked following Russia’s invasion of Ukraine. 

Taking the temperature with business heads

Hot on the heels of the Budget, the BoE released its Decision Maker Panel survey of Chief Financial Officers from small, medium and large UK businesses (firms across the whole economy, not just consumer-facing), on 7 March6. A temperature check taken between 2 and 16 February, the 2,373 influential heads of business respondents, said they expected their output price inflation to decline by 1.1 percentage points over the next 12 months (based on three-month averages).

Annual wage growth was put at 6.7% in the three months to February, down 0.1 percentage point from the three months to January. More importantly though, the firms surveyed said they expected their wage growth to decline by 1.5 percentage points over the next 12 months (based on three-month averages). A slight fly in the ointment was the expected year-ahead wage growth figure to still be unchanged at 5.2% (on a three-month-moving-average basis) something the BoE is tracking but the direction of travel thereafter should be down. Before the COVID-19 pandemic, when inflation was close to the BoE’s 2% target, annual growth in basic pay was around 3%.

Annual employment growth of 2.3% was reported in the three months to February, down on the 2.4% reported in the three months to January. Expected year-ahead employment growth was 1.6% in the three months to February, down 0.1 percentage points from the three months to January. The survey results align with other signs that Britain’s job market is cooling, a development which should broadly ease pressure on wage growth and provide some comfort to BoE policymakers.

A few sticky issues

There are some exceptions. A rise in the National Living Wage (NLW) by 9.8%, in April, serves as a stimulus and in the battle to retain retail staff a slew of supermarkets including Tesco, Co Op, Sainsbury’s, Asda, Aldi, Lidl, M&S and Waitrose, have all announced salary increases of above the NLW level 7,8,9. The impact of these large, low-wage employers could push CPI inflation back to above 2.0% towards the end of the year but ahead of then inflation should drop.

The heavily trailed 2p cut in national insurance could have been viewed as inflationary also but with a number of small tax increases on items such as vaping, tobacco and holiday home lets amongst other things, the overall impact can be broadly assessed as neutral10.

Headlines services inflation has been another slightly sticky issue. At 6.5% in January, it has come down only slightly from its peak of 7.4% in July 2023. As the cost of services/bills index-linked to inflation, such as mobile phone contracts, some rents and property insurance charges, rise less than last year, however, this figure too should start to decline more meaningfully.

Maybe it is Spring and the hope and renewal it unleashes, or just good old-fashioned analysis based on intense research, but we are of the opinion that inflation is now headed decisively lower. As a result, we have sold out of all our inflation-linked gilts and replaced them with nominal bonds. We like the duration component of the inflation-linked bonds but not the inflation-linked component, as we don’t believe the expected fall in inflation is fully priced in.

1 Jay Powell says Federal Reserve ‘not far’ from having confidence to cut interest rates ( 7 March 2024
2 BOE Can Cut Rates Before UK Inflation Returns to Target: Bailey – Bloomberg 20 February 2024
3 Christine Lagarde signals June rate cut as ECB lowers inflation forecast ( 8 March 2024
4 Changes to energy price cap between 1 April to 30 June 2024 | Ofgem publication date 23 February 2024
5 Hunt extends fuel duty freeze and raises premium air passenger duty ( 6 March 2024
6 Monthly Decision Maker Panel data – February 2024 | Bank of England publication date 7 March 2024
7 National Minimum Wage and National Living Wage rates – GOV.UK ( as at 8 March 2024
8 John Lewis and Co-op to increase minimum pay for staff – BBC News 7 March 2024
9 Tesco latest supermarket to increase staff pay – BBC News 6 March 2024
10 Budget 2024: UK taxes head for highest level since 1948 despite Hunt’s NI cut | Budget 2024 (spring) | The Guardian 6 March 2024
Keith Balmer
Portfolio Manager
Share on linkedin
Share on email
Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle.

You might be interested in...

15 April 2024

Is interest rate pessimism overdone?

The European Central Bank looks set to cut in June and there are reasons to believe the US and UK won’t be too far behind.
Watch time - 4 min
8 April 2024

Interest rates, inflation and immigration

Do rising US rents, fuelled in part by higher immigration, call for a reappraisal of the likely scale and pace of US interest rate cuts?
Watch time - 6 min
2 April 2024

The first cut is the easiest

With real rates rising as inflation falls, we explain why central banks should consider cutting interest rates soon.
Watch time - 4 min

Why Columbia Threadneedle for low-cost multi-asset

Columbia Threadneedle Universal MAP redefines value through active multi-asset solutions and business support at a passive price point. Fund OCFs at 0.29%-0.39%.

Our Portfolio

The Columbia Threadneedle Universal MAP and Sustainable MAP ranges offer risk-controlled portfolio options designed to cover a host of client growth, income and sustainability needs.

Important information

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

For professional investors only.

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

The Fund is a sub fund of Columbia Threadneedle (UK) ICVC III, an open ended investment company (OEIC), registered in the UK and authorised by the Financial Conduct Authority (FCA).

English language copies of the Fund’s Prospectus, summarised investor rights, English language copies of the key investor information document (KIID) can be obtained from Columbia Threadneedle Investments, Exchange House, Primrose Street, London EC2A 2NY, telephone: Client Services on 0044 (0)20 7011 4444, email: [email protected] or electronically at Please read the Prospectus before taking any investment decision.

The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing.

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium