UK inflation below BoE target for first time since 2017

Consumer prices rose a less-than-forecast 1.8% in January from a year earlier, down from 2.1% in December and the smallest increase since January 2017.

Feb 14, 2019 02:02 IST India Infoline News Service

UK inflation is back below the Bank of England’s (BoE) 2% target for the first time in two years, providing officials with further reason to refrain from raising interest rates as Brexit fears grip the economy.

Consumer prices rose a less-than-forecast 1.8% in January from a year earlier, down from 2.1% in December and the smallest increase since January 2017.

The figures are a boost for consumers, who were squeezed by the sterling-induced inflation surge after the 2016 Brexit referendum and now face an uncertain future outside of the European Union. With wage growth at its strongest in a decade, workers are once again enjoying real spending power.

Pressure on inflation last month came from cheaper auto fuel, as well as a sharp fall in gas and electricity costs after price caps imposed by the energy regulator came into force on January 1, the Office for National Statistics said Wednesday.

Clothing and footwear prices were more heavily discounted in the New Year sales than they were in January 2018, while the cost of hotel accommodation also fell more sharply.

These were partly offset by airfares and ferry-ticket prices, with post-Christmas discounts failing to match those seen a year earlier.

Consumer prices overall fell 0.8%, compared with 0.5% in January last year. The slowdown has proved much sharper than the BoE expected.

In November, it predicted inflation would average at 2.2% in the first quarter. It now forecasts just 1.8%, with the rate staying below target for the rest of the year.

Under Strain

Real wage growth is supporting an economy under strain amid fears that Britain is heading out of the EU on March 29 with no deal to cushion the blow. Business investment fell the most in a decade last year, dragging down economic growth.

With domestic cost pressures building, the BoE says further rate increases will eventually be needed, though officials last week sent a message that nothing will happen until the “fog of Brexit” clears.

Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, stayed at 1.9% in January, as forecast. It marks the first time underlying inflation has been higher than the headline rate since November 2016.

Producer input prices fell 0.1% from December, taking the annual rate to 2.9%. Output prices rose 2.1% on the year.

Brexit fears continued to take a toll on the property market, with annual house-price growth slowing to just 2.5% in December, the least since July 2013. London, the worst-performing region, saw values fall 0.6%, the first decline over a calendar year since 2008.

Source: Bloomberg

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