United Kingdom
- The worst of the inflation crisis should now be behind us, but expect significant divergences for different goods
- The UK still faces greater inflationary risks ahead relative to the US or other European markets
- Secondary effects of the inflation surge, such as service inflation, still remain and are likely to be key to the outlook for the Bank in 2024
With the Bank of England still battling inflation and the cost-of-living crisis biting hard, 2023 has been a difficult year for many. Food prices are rising at a more moderate pace than they were at their early 2023 peak, but they are still rising at a rapid pace (see Figure 1). For many people, the cost of Christmas dinner is going to be a hot topic, as people try and budget for one of the most important days of the year.
Figure 1: BRC Nielson Shop Price Index (Food, year-on-year % change)
Source: Bloomberg. Data as at 31 October 2023.
Staying at home may not be as bad as you think
The good news is that Kantar have reported the average cost of a frozen turkey Christmas dinner for four with all the trimmings, Christmas pudding and sparkling wine was up by just 1.3% at £31.71. That’s just under £8 per person. That’s a rate of inflation well below the headline rates and reinforces that the worst of the inflation crisis should now be behind us. There are some quite significant divergences within the Christmas basket though, brussels sprouts and Christmas pudding were cheaper year-on-year, but Cranberry sauce was up a massive 26%.
Going out is more painful
For those wanting to get out of the house, Wetherspoons will be charging £12.05 for Christmas lunch this year and that includes a soft drink – that’s up 13% from the £10.69 charge in 2022. Pubs and bars are still facing the secondary effects of the inflation surge, with still significant wage pressure in lower-paid segments of the labour market and sizeable jumps in the UK’s minimum wage to factor in.
At the Savoy, you probably don’t care about the price anyway
For those willing to splash out, Christmas dinner at The Savoy Grill is £290 a person, a 5.5% increase from the £275 per person charge in 2022. More expensive restaurants will be a little more insulated from wage gains – but sadly drinks are extra, so it may be better to not look at the bill at all.
Service inflation is still key to the Bank of England
Although goods prices are benefiting from an easing in the post-pandemic supply bottlenecks, service inflation is likely to be key to the outlook for the Bank in 2024. In a recent interview, the deputy governor the Bank, Sir David Ramsden, warned that UK inflation was “becoming much more home grown”, with “much stickier” prices in the service sector which will make it difficult for the Bank to achieve its 2% inflation target. We would agree with this assessment and, although headline inflation in the UK has converged towards other major economies, we’d caution that the UK still faces greater inflationary risks ahead than the US or other European markets.
