Data released since the MPC last met in December has continued to point to an economy that is struggling to grow and a labour market that is loosening. Headline inflation remains above target but has broadly matched the committee’s expectation in its November forecast.
Headline inflation fell to 2.5% in December, from 2.6% in November. The reading was in line with the MPC’s forecast. Services inflation took a big leg down to 4.4%, from 5% – coming in 0.3-percentage-point below the committee’s expectation. Much of the undershoot was the likely result of movements in volatile airfare prices but there were also signs that underlying momentum in price pressure is cooling.
GDP showed few signs of growth in the final months of 2024. The MPC already flagged in the minutes of its December meeting that it expected no growth in 4Q24. The risks are tilted toward the economy contracting following November’s modest 0.1% rise in monthly GDP. The PMI for January suggested growth continued to stall at the start of 2025.
The labour market is also cooling with the unemployment rate coming in at 4.4% in the three months to November. The MPC foresaw a reading of 4.2% for 4Q24 in its November forecast. Forward-looking indicators point to more softening ahead, challenging the committee’s view that the jobless rate will remain broadly flat over the coming year. Bloomberg expect it to rise to 4.7%.
Regular pay growth in the private sector was 6% in the three months to November, up from 5.5% in October. The data is set to overshoot the central bank’s projection for a 5.1% print in 4Q24. Still, Bloomberg doubt the committee will worry about the overshoot – it flagged that it viewed the data as volatile in the minutes of its December meeting.
The MPC’s November forecast was characterized by the view that some slack would need to open up to ensure a sustainable return of inflation to target. Bloomberg expect the committee to judge that process is occurring more quickly than anticipated three months ago with the recent weakness in the economy driven by slower-than-expected demand growth. That will be the main argument for lowering rates in February.