Has inflation peaked?

With inflation rising above 3% in November, there are some reasons to think that it has now reached a peak. It remains the case that the primary driver of the rise in inflation has been the slide in sterling. However, its impact does appear to be fading, with core goods inflation already beginning to ease back, and food price inflation also probably about to fall. Admittedly, a drop in inflation is not a foregone conclusion. Indeed, it continued to rise to over 5% following sterling’s last major depreciation. However, the rise back then was exacerbated by a sharp increase in global commodity prices and VAT hikes. While energy prices (including oil) have been on the rise recently, the magnitudes of change are smaller. As a result, these factors could probably just prevent a sharper fall-back in inflation, rather than mean it takes another big leg up. Far from easing the pressure on the MPC to raise interest rates again, however, lower inflation would lessen the squeeze on households’ real earnings and make further interest rate rises more manageable, and more likely.