UK inflation for December surprised to the upside, with the headline consumer price index hitting 5.4% year over year. Globally, inflationary pressures should ease over 2022 as some of the factors associated with the reopening dissipate. The key questions are: when and how fast does inflation fall and where does it stabilise? In the UK, with the price cap on energy bills expected to increase by about 50% in April, there is likely to be further upward pressure on inflation in the near term. Fortunately for consumers, tight labour markets are supporting strong wage gains. While these will ease the pain over the coming months, they could also fuel a longer period of above target inflation. Against this backdrop we think the Bank of England will hike interest rates by 25 basis points in February.

UK inflation at highest rate since 1992

% change year on year