UK inflation eases off to near 2yr low
By Oliver Haill
Date: Wednesday 16 Jan 2019
(Sharecast News) - UK inflation eased off at the end of last year, as expected, due to a fall in fuel prices and airfares.
Year-on-year growth in the headline consumer price index dropped to 2.1% from 2.3%, the Office for National Statistics revealed on Wednesday. On a month-on-month basis, CPI remained at 0.2%, which was also in line with economists' forecasts.
The Bank of England's Monetary Policy Committee targets a CPI rate of 2%.
Core CPI, which excludes more volatile prices such as fuel and food, rose unexpectedly to 1.9%, from 1.8%. And CPIH, which is the ONS's preferred measure of inflation as it includes the costs of owner-occupied housing, fell back to 2% from 2.1%, while the expectation was for it to remain unmoved.
Producer input prices grew 3.7% year on year, slowing from 5.3% the month before to the lowest rate since June 2016, while factory output price growth slowed to 2.5% from 3%.
Over the course of 2018, transport largely drove changes compared to the previous year, with fuels and lubricants moving broadly in line with changes in world prices for crude oil and crude oil prices driving movements in the 12-month growth rates for factory prices and almost entirely explaining the fall between November and December's producer price index.
"The headline reading is now at its lowest in almost 2 years and fears of runaway inflation have been put to bed for the time being," said David Cheetham, chief market analyst at XTB.
With inflation within touching distance of the Bank of England's 2% target, Tom Stevenson at Fidelity International said: "All eyes will now be on next week's UK earnings data to see if our wages have continued to widen the gap with rising prices. With inflation forecast to fall below target next month and for much of 2019, a year of improving purchasing power looks to be the most likely scenario."
He acknowledged that the data raises questions about what this means for the trajectory of interest rates.
"With UK CPI a whisker away from the Bank of England's target, and last night's vote providing more questions than answers on Brexit, it would seem that the Bank of England's Monetary Policy Committee has little incentive to hike rates any time soon. The good news is that the pound seems to have taken political turmoil in its stride. Weaker sterling would threaten higher inflation but the prospect of a softer Brexit makes a rebound in the pound seem the likelier option."
Ruth Gregory at Capital Economics said falls in input and output PPI, as leading indicator of core price pressures, suggest both the core and overall rates have further to fall, with the new regulatory energy price cap also expected to subtract 0.2 percentage points from CPI inflation in January.
She agreed that Brexit uncertainty is likely to keep the MPC on hold for the time being, although she said "we doubt the Bank will miss out on the global tightening cycle altogether".
"The MPC has raised rates several times in the past when the prevailing rate of inflation has been below target, because it feared that domestic price pressure would build if it did not act. And with external pressures depressing inflation and a recovery in wage growth in train, we suspect it won't be too long before the MPC reaches the same conclusion again."
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