Inflation reared its head again in December, jumping from 3.7% to 4.5%. The increase in inflation was explained mainly by higher airfares, by a substantial increase in heating costs and the impact of discount days in November fully reversing. Thus, the rise in inflation can largely be traced to specific, volatile components and there are no signs that underlying inflationary pressure has increased to any significant extent.
The December inflation figure significantly reduces the likelihood that the Monetary Policy Committee will cut interest rates at its next meeting in February, as it seems unlikely that inflation will subside to any real extent in January. We nevertheless continue to expect inflation to ease gradually in the new year as tension in the economy diminishes, paving the way for interest rate cuts.
The easing of economic tension is reflected most clearly in the labour market, where increasingly clear signs of cooling can be observed. Demand for labour has continued to decline, job vacancies have decreased, employment is no longer growing and unemployment is rising.
The housing market also remains calm - new homes are selling slowly and price increases have slowed markedly in recent months. Nominal housing prices have risen by 2.7% over the past twelve months, while real housing prices have declined year-on-year for four consecutive months. Uncertainty about loan terms in connection with the interest rate ruling left its mark on recent months and demand may increase again in the coming weeks once that uncertainty has been resolved. At the very least, demand can be expected to increase as interest rates decline over the coming quarters.
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