UK January Inflation Hits Two-year Low

Declining energy bills and fuel dragged UK inflation down to a two-year low in January and lower than the Bank of England’s (BoE) target, official data showed.

The Office for National Statistics (ONS) reported that Consumer Prices Index (CPI) climbed at an annual rate of 1.8 percent last month from a 2.1 percent rise in December. Economists’ had expected CPI to drop in January to 2 percent, BoE’s inflation target.

January’s fall, which was partially offset by higher air and ferry fares, ended higher than economists’ expectations and comes as latest data shows wages growing by 3.3 percent. 

British consumers have been pressured by inflation after the pound fell more than 10 percent against the US dollar and euro since the Brexit referendum in June 2016.

Inflation rose to a five-year high of 3.1 percent in November 2017, when households in the UK were experiencing much larger price increases than the European Union (EU) average, while it was last at 1.8 percent in January 2017.

ONS Head of Inflation Mike Hardie stated that the fall in inflation due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year.

Energy price cap by the Office of Gas and Electricity Markets (Ofgem), which came into effect at the start of January, helped lower inflation, according to the ONS.

Short-lived Inflation Drop

However, UK Economist Andrew Wishart said the fall in CPI inflation below BoE’s target for the first time in two years last month adds support to households’ real spending power, although it is unlikely that inflation will drop any further.

Ofgem’s energy price cap is also due to increase in April and this could end up in future CPI figures.

Furthermore, Britain could see higher inflation again if a firm Brexit deal is not reached.

Chief Economic Adviser Howard Archer said the further falling back in inflation facilitates the BoE maintaining a wait and see approach on interest rates until after the UK leave the EU.

Despite the decline in inflation since late 2017 and wages climbing at their fastest rate in ten years, businesses have experienced a slump in consumer spending in recent months.

Households have expressed concern over this year’s outlook, according to surveys, as the UK seemed set to depart from the bloc without a deal on March 29 unless UK Prime Minister Theresa May can negotiate a revised agreement with the EU that her divided party and parliament would approve of.

Assuming there is a Brexit deal, Archer stated that inflation could stay below 2 percent in 2019 and even tumbled to 1.6 percent.

If an accord is not formed, the scenario would be different and the BoE might cut interest rates as economic activity would likely take a significant hit, he added.

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