Trends: UK Inflation and Interest Rates over time

I've compiled the CPI (Consumer Price Index) data alongside the Bank of England interest rates for every day starting from 1989.

The data has been sourced from the following websites:

- Bank of England Database

- Office of National Statistics

For those interested in accessing the complete raw data in a spreadsheet format, it can be downloaded below:

231018 Interest Rates v CPI - Historical.xlsx

Download XLSX • 439KB

What does the data say?

One significant observation from the data is the 2.5-year span it took for the CPI to decrease from 9.2% to 2.6%, from the close of 1990 until May 1993. This may suggest that reaching a 2% inflation level won't be rapid. However, the data shows a steady decline in inflation during this period. While there were intermittent pauses in its descent, these rarely lasted beyond three months.

Inflation's behaviour over time generally followed trends; it didn’t oscillate unpredictably. When interest rates rose, inflation consistently decreased without erratic fluctuations. Each inflationary period is distinct and has its unique underlying narrative. For example, the late 1990s and early 2000s saw an economy robust enough to tolerate interest levels up to 5% even with sub-2% inflation. Such a scenario seems improbable in today's economic context. In the aftermath of the 2008 financial crisis, the emphasis shifted to liquidity. Hence, even in the face of rising inflation, interest rates remained at historic lows.

It's crucial to approach the current inflationary landscape with caution. The combination of post-COVID recovery, lockdowns, furlough payments, and global shortages creates a unique blend of factors. These might have a more pronounced effect on the current inflation narrative than, for instance, 14 years of quantitative easing or the conflict in Ukraine.

So, what's the takeaway from the data? It suggests that shifts in interest rates will likely lead to a relatively swift overall reduction in inflation. Any upticks in inflation are likely to be brief and minimal. The initial decline in inflation will be sharp, but it may plateau as inflation nears 4%. The pace of this decline will decelerate considerably as it approaches 3%.

Inflation & Interest Rate Predictions

While the upcoming estimates are rooted in historical data and my understanding of financial institutions' potential direction, they are, guesses. Numerous unforeseen global events in the coming months could significantly influence inflation.

Nevertheless, these estimates provide a foundation for anticipating the trajectory of inflation rates and base interest rates. Such insights can help us gauge potential impacts on various sectors. For instance, given our interest rate assumptions, could we expect an uptick in new housing constructions by the end of 2024?

Here are my predictions for interest rates and inflation trends for the latter part of 2023 and throughout 2024:

It's important to note that these are speculative predictions, not grounded in concrete evidence. Numerous unpredictable events in the coming year could influence these factors. However, despite the Bank of England's objectives of 2% interest rates, I anticipate inflation levels reaching around 3.5% by the close of 2024, with interest rates hovering near 3%.

To stave off a recession, I foresee the Bank of England making gradual adjustments to combat inflation throughout the period. It's unlikely that interest rates will exceed their current levels. We can expect a consistent base rate leading up to January and continuing through most of 2024. In my opinion, the Bank of England would prefer to maintain steady rates rather than make premature adjustments that might necessitate erratic rate changes later on.

However, a word of caution: my projections don't align with the International Monetary Fund (IMF)'s viewpoints.

Source: https://www.bbc.co.uk/news/business-67056069

The IMF forecasts interest rates remaining above 4% through 2028. They also anticipate the UK enduring the highest inflation and the slowest economic growth among the G7 nations in 2024. Historically, the IMF's predictions tend to be within a 1.5 percentage point margin of the actual outcomes. However, I'm skeptical about experiencing an unprecedented prolonged period of inflation, like nothing we've seen since 1989, that cannot be curtailed by interest rates. Therefore, I disagree with the IMF's suggestion that elevated rates will be maintained for such an extended duration.