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24 Feb 2025 | 3 minutes to read
Persistent price pressures amid a weak economy caused a headache for the Bank of England (BoE) last week as January UK Consumer Price Inflation (CPI) rose unexpectedly to 3%, the highest level in 10 months. The rate of changing prices surpassed both December’s 2.5% and the 2.8% forecast for January, with key drivers being higher food prices and non-alcoholic drinks, airfares falling less than usual in January and newly-imposed VAT on private school fees. Despite the BoE anticipating inflation will hit 3.7% later this year driven by higher energy and water bills and National Insurance increases from April, it will likely maintain its current pace of interest rate cuts.
Recently meagre GDP growth of +0.1% in Q4 last year was mainly driven by increased public sector spending. Private sector activity and business confidence have been dented by the Budget. Policymakers may fear ‘stagflation’: a horrid mix of weak growth, higher inflation and rising unemployment. While unemployment remains steady for now, stagflation would be an unwelcome complication for officials managing future interest rate cuts.
On a more positive note, UK retail sales surprisingly increased 1.7% in January, well above the forecasted 0.3% rise and the first growth since August. The food and drink sector led the way with a 5.6% increase. This uptick suggests potential economic recovery, with retail sales as a key indicator of household consumption, a driver of economic growth and one of the government’s top priorities.
Minutes released last week from the US Federal Reserve’s January interest rate-setting meeting showed that potential changes to trade and immigration policies, together with strong consumer demand, led officials to hold steady at 4.5%. Policymakers are uncertain whether President Trump’s polices may be inflationary, and many businesses have stated that they would pass on any additional tariff costs to the consumer. Despite some evidence that higher-for-longer rates are slowing inflation, the Fed’s rate-setting committee noted its next move will be data-dependent to achieve its dual mandate of full employment and 2% inflation over the long-run. The next interest rate decision is scheduled for 19 March.
Germany’s Conservative Christian Democrat Union and its sister party the Christian Social Union look set to lead a new coalition government after winning 28.5% of votes, with leader Friedrich Merz calling for “independence from the US”. The populist far-right party Alternative für Deutschland (AFD) came second with 20.8% - a surge of support almost doubling its representation in the Bundestag. Ousted Olaf Scholz’s Social Democrats came third with 16.4% and the Greens fourth with 11.6%. Building a coalition will be messy. Merz has pledged to maintain a ‘firewall’ forbidding any cooperation with the AFD, a party his supporters believe was endorsed by President Trump and Elon Musk. Any viable coalition will have its work cut out: the polarisation of German politics will make addressing a range of issues, from Europe’s defence spending and the role of NATO to fixing Germany’s infrastructure investment, very difficult.
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