Resurging UK Inflation Will Keep BOE Cautious on Cutting Rates

(Bloomberg) -- UK inflation probably hit its highest level in 10 months in January, continuing a resurgence in price pressures that has made the Bank of England wary over rushing into interest-rate cuts.

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Data on Wednesday are expected to show consumer prices rising 2.8% compared to a year earlier, driven by a jump in private school fees and a reversal of volatile factors that weakened inflation in December, according to the median projection of economists surveyed by Bloomberg.

The figures may support worries among BOE rate-setters that Britain’s inflation outlook is darkening at a time when the economy is also stagnating. It expects higher energy bills to lift consumer-price growth to a peak of 3.7% later this year.

While two officials backed a bumper half-point rate cut when the UK central bank eased monetary policy earlier this month, the majority of the committee still sees a need for a guarded approach to lowering borrowing costs.

Most concerning will be an uptick in underlying measures being watched closely by the BOE for signs of domestic pressures.

Services inflation is expected to rebound sharply from 4.4% to 5.2%, driven higher by erratic components such as air fares and an increase in private school fees after the Labour government made them subject to VAT.

What Bloomberg Economics Says:

“With the economy weak we doubt it will stop the BOE from easing further. We expect three more 25 basis-point rate reductions in 2025.”

—Dan Hanson and Ana Andrade. For full analysis, click here

The labor market will also be in focus this week with data on Tuesday expected by forecasters to show wage growth excluding bonuses picked up to 5.9% in the fourth quarter, up from 5.6% previously.

While there are signs that Britain’s jobs market is loosening, pay pressures are seen as too strong to keep inflation near the BOE’s 2% target.

Data suggest that the number of UK workers being put on notice for the axe is running well below levels seen a year ago. Scarred by the struggle to recruit in the tight post-Covid labor market, firms may be still reluctant to let go of workers and hoarding labor.

Elsewhere, Australia’s first rate cut in the current cycle, another reduction in New Zealand, and purchasing manager indexes from around the world will be among the highlights.

Click here for what happened last week and below is our wrap of what is coming up in the global economy.