UK inflation forecast to come in above Bank of England’s target again in December – business live

Key events

Thames Water plans executive pay rise to get around bonus cap – FT

Thames Water has reportedly threatened to raise executives’ base salaries if the UK government pushes ahead with plans to limit bonuses.

Britain’s largest water company, which intends to raise bills by at least a third for the 16m customers it serves in and around London, has warned the water regulator of its plans to raise base pay, according to a report by the company’s regulatory strategy committee to the board of Thames, the Financial Times reported.

The report dated 3 December, by Jon Haskins, chief risk and compliance officer at Thames, said, according to the paper:

We have made it very clear to Ofwat that, if it proceeds with its proposals, it is highly likely that base pay will need to be increased to compensate for the loss of performance-related pay plans.

We also highlight the impact the proposals will have on attracting, retaining and motivating critically needed talent across the sector, and the importance of this for attracting investment.

The plan to clamp down executive pay at badly performing water companies is part of the government’s water (special measures) bill, which is making its way through parliament and is expected to be ratified this year.

In November, the regulator determined that the sector had awarded “undeserved” extra payments, worth £6.8m, forcing investors at Thames, Yorkshire Water and Dŵr Cymru Welsh Water to pick up the tab for executive bonuses.

Ofwat said it had used new powers to ensure that bonuses at the three companies were paid by shareholders and bondholders – rather than through customer bills – because the payments had not “adequately reflected overall company performance issues”.

Water companies have faced public anger and political backlash in recent years over leaks and sewage overflows as they have also come under increasing financial strain.

Nine water companies will not be allowed to use customer funds to pay bonuses worth £6.8m. Six voluntarily said that shareholders would pay, but Ofwat had to use its powers directly in the cases of bonuses worth £1.5m from Thames, Yorkshire and Welsh.

Ellie Henderson, a UK economist at Investec, is expecting UK inflation to tick up to 2.7%.

Similar to November’s increase, we do not single out one particular factor behind the rise. Instead our forecast reflects the confluence of various upward influences, including base effects once again. One unknown is to what extent businesses are already preparing for the higher cost of labour come April – itself a reflection of higher NICs [national insurance contributions] and changes to the national living wage – by starting to increase prices. Being extremely volatile in nature, airfares also have the potential to cause swings in the headline inflation rate. We expect there was a small boost to inflation from this component in December.

From there we forecast inflation to remain above the 2% target for the entirety of 2025, but the core measure to make further progress lower from the spring. This disconnect can largely be explained by energy prices, with the absence of the sharp falls in prices over the course of 2024 lifting inflation in 2025. Some inflationary impact from the budget is also likely to feed into overall cost pressures. The big unknown at this point is the shape of Trump trade policy, and crucially, the response of others including the UK to any significant changes.

Introduction: UK inflation forecast to come in above target again in December

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

It’s inflation day! We’ll be getting inflation figures for the UK first thing, followed by US data later in the day.

UK inflation is expected to have stayed at an annual rate of 2.6% in December, while the core rate, which strips out volatile energy and food costs, is forecast to have edged lower.

The figures will be released by the Office for National Statistics at 7am GMT. The Bank of England’s target is to keep inflation at 2% over “the medium term,” i.e. the next two years.

Core inflation is expected to have dipped to 3.4% from 3.5% in November, still uncomfortably high for the central bank.

Michael Field, European equity strategist at Morningstar, said:

UK inflation is expected to remain steady at 2.6% for December. While the word steady usually sounds like a good thing, investors and central bankers will be relatively unhappy with the current level, which sits significantly above the Bank of England’s 2% targeted level. We believe it’s too early to be talking about the prospect of Stagflation, but it’s certainly something already concerning many investors.

The one positive in the mix is that core inflation, which strips out volatile components such as food and energy, is expected to decline slightly to 3.4%. But once again, this number sits far above the targeted level for inflation.

Some investors have been vocally critical about the seemingly slow pace at which the Bank of England is cutting rates. Ultimately, we do not believe that inflation will ramp up any further, but getting inflation consistently closer to the key 2% level might be difficult from here. So perhaps we should already be adjusting our expectations for interest rate cuts in 2025.

Markets are on tenterhooks ahead of the US inflation figures for December. They are expected to show an increase to 2.9% in the annual rate in December, from 2.7% in November.

Traders have already scaled back their bets on US interest rate cuts, and are only expecting one quarter-point reduction by December.

The Agenda