Four Reasons to Expect Falling Inflation during 2023

2022 was a year when the rate of consumer price inflation accelerated sharply rising to 11% in November. As Chris Giles noted in a recent FT opinion piece, “a generation has had to worry about a rapidly rising cost of living for the first time in their working careers.” However, there are tentative signs that inflation has peaked and will start falling as we head into 2023. Here are four reasons to expected a period of disinflation for the UK over the next twelve months.

Four Reasons to Expect Falling Inflation in 2023

1/ Energy prices are weakening

Prices paid in Europe for natural gas have fallen in recent months. The UK government has introduced extra price support measures that will last until April 2023. Crude oil prices are well below their high earlier on in 2022

2/ Sterling has recovered some ground against the US dollar

There was a calamitous depreciation of sterling in the wake of the mini-budget fiasco in September. Sterling got close to parity with the US dollar. But it has since recovered some ground which is helping to limit input price inflation.

3/ Rising interest rates will curb aggregate demand

The Bank of England has raised interest rates in each of their last nine meetings. Base rate has climbed from 0.1% during the pandemic to 3.5% now. Higher interest rates squeeze consumer spending and put pressure on businesses to cut costs.

4/ The UK is in recession and the world economy is stalling

Likely, the UK is already in a recession – this will bring about disinflation during 2023. Global GDP growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. Weaker growth will help to bring down commodity price inflation.