My forecast for next year’s financial winners and losers | Personal Finance | Finance

The inflationary surge of the last two years has cast a huge shadow over everybody and everything. Combined with the energy shock, it’s triggered a desperate cost-of-living crisis, that’s left millions facing a desperate choice between heating their homes and eating.

The government has been forced to issue a stream of cost-of-living payments, just to stop people from freezing or starving, putting more pressure on the Exchequer. Taxes have climbed to pay for it.

Mortgage payments rocketed, with homeowners paying up to £500 a month more the moment their low-cost fixed rates came to an end.

Consumer price inflation proved horribly sticky. In October 2022, CPI peaked at 11.1%. As recently as May, it stood at 8.7%.

October was the game changer, with inflation crashing to 4.6 percent but today is an unexpected bonus.

Annualised consumer price inflation of 3.9% in November is the lowest since September 2021, more than two years ago.

At that point, the Bank of England was holding base rates at 0.1%. Today, they stand at 5.25%.

Better still, core inflation – which excludes volatile figures such as housing costs – also fell strongly, from 5.7% in October to 5.1%.

Core inflation is closely watched by the BoE, so it’s good to see that it’s heading in the right direction, too.

Yesterday’s dramatic and unexpected drop kills the myth that the UK is an “outlier”, destined to suffer higher inflation than the US and Europe.

US inflation was lower than ours at 3.1% in November, but the difference is rapidly narrowing. We’re now level with France. Germany’s inflation is lower at 2.3%, but it’s facing a double-dip recession and we’re not.

Things are going to get better.

Yesterday’s drop couldn’t have come at a better time, with Christmas upon us. Slowing food, drink, toys, games and even petrol prices should give us a lift over the festive period. Retailers will be happier, too, as shoppers discover their Christmas cheer.

Plus it sets us up nicely for 2024.

The inflation drop has made the Bank of England look completely out of touch yet again, although it rarely needs help in that department.

BoE governor Andrew Bailey has made the whole inflationary episode even more painful, by initially claiming it was “transitory” and refusing to take early action that may have spared us the worse.

Now he’s set to make the opposite mistake by keeping interest rates too high for too long, at a risk of plunging us into a needless recession.

Incredibly, three members of BoE’s rate-setting monetary policy committee (MPC) voted for yet another interest rate increase earlier this month, which would have lifted base rates to a nonsensical 5.5%.

The inflation drop makes that make them look even dafter than they seemed at the time. Headline, core and services inflation are all now materially below the predictions made in the BoE’s Monetary Policy Report – published just weeks ago.

Markets have lost all faith in the BoE’s predictive ability, and rightly so. I wouldn’t trust Bailey to forecast Christmas Day.

No doubt he will spend the next few days banging on about how inflation isn’t beaten yet and interest rates may still have to rise.

Markets will be too busy celebrating to listen. They’re already predicting four interest rate cuts next year, and now they might increase that to five or six.

There are still risks. November’s inflation drop was driven by the falling oil and gas price, and that could go into reverse if the Red Sea crisis intensifies.

Bailey will seize on any opportunity to talk up the inflationary threat, but is only talking down his own reputation.

Banks have seen the writing on the wall and are busily slashing mortgage rates.

This means we will avoid a house price crash while the stock market will rally, boosting our pensions and Isas. The FTSE 100 is already up 1.37% on this morning’s news.

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt will be happy as they’ve thrashed their target of cutting inflation to five percent by year end (even if they had little to do with the outcome).

Savers will be the losers, because as I’ve been warning for months, interest rates will fall.

But the biggest losers will be Andrew Bailey and the BoE, whose reputations are sinking even faster than inflation.

Let’s hope they wake up to the new reality in 2024, and start talking about cutting interest rates rather than hiking them. Then we’ll really see some fireworks.