Q1: cost of living impact

The cost of living crisis is a daily news item that continues to cause concern. Inflation has been driven initially by spiralling utility prices and changes in the global economy sparked by the Covid-19 pandemic. The UK is not alone; the position is similar worldwide.

As we start Q1, we have pulled together a high-level 'state of the economy' report based on five crucial factors; inflation, mortgages, grocery costs, utility costs and interest rates. It is designed to create a snapshot of the broader economy and how it impacts people looking to buy a car and source finance.

In short, while interest rates may not yet have peaked, inflation may have done with encouraging signs that utility prices may start to decline. There is plenty of scope for change, but as we start 2023 economically, there is room for optimism as we look ahead.

UK inflation

Inflation is measured by the Office for National Statistics (ONS) and is based upon a 'typical' basket of goods defined by the ONS. There are two measures used by the ONS, the Consumer Prices Index, including owner occupiers' housing costs (CPIH) which rose by 9.3% in the 12 months to November 2022, down from 9.6% in October and the more commonly used Consumer Prices Index', or CPI, which excludes housing costs, which fell to 10.7% in November, down from 11.1% in October. Both are well above the Bank of England target of 2%.

In its November 2022 Monetary Policy Committee report, the Bank of England predicted that inflation would decrease below 10% after March 2023 before dropping below 2% in the first half of 2024. It expects that by the end of 2023, inflation will be between 5% and 6%.

Mortgages

For most mortgage borrowers, changes in the Bank Rate have had no effect on their mortgage rate in the short term. Currently, 74% of homeowner mortgages are on a fixed rate contract, with 96% of new borrowers choosing this option since 2019. Therefore, most borrowers will see no immediate increase in their monthly repayments.

Grocery costs

Grocery price inflation for December stood at 14.4%, down slightly from 14.6% in November. It was the second month in a row that grocery price inflation had fallen, raising hopes that the worst has now passed. However, it's still a painfully high figure.

Utility costs

Rising utility prices have been the primary driver of inflation, and their impact on people and businesses has then fed into broader price rises. It appears there is room for optimism looking ahead.

Natural gas prices closed at a 15-month low in the first week of January due to mild weather, an influx of liquified natural gas (LNG) and high gas storage levels.

The net result sees forecasters suggesting that the energy price cap, which dictates what suppliers can charge for gas and electricity, will fall as low as £2,600 per year from July. Well below previous predictions, it would mean that households' utility bills could be hundreds of pounds less than feared.

Interest rates

In December, the Bank of England increased Bank Rate to 3.5%, the ninth consecutive rise. At the same time, the Bank advised borrowers to prepare for fresh increases in the new year. While further rises seem likely to help stem inflation, forecasters believe it could peak at 4.5% in 2023.

The effective rate on new personal loans to consumers increased by 64 basis points to 7.87% in November, the highest level since December 2017. Since then, the Bank of England Bank Rate has increased, as noted above.

Chris Rowthorn, Director of Motor Sales Operations