Inflation dips to 3% to ease pressure on BoE for rate rise
Annual growth in CPI eased in December thanks to lower price rises for airfares, games and toys
UK consumer price inflation fell from 3.1% in November back to 3% in December, according to figures released today by the Office for National Statistics (ONS). This was the first decrease recorded for six months, with the fall fuelling hopes that inflation has peaked following a near six-year high. The outcome was in line with expectations, with some economists believing Britain’s soaring inflation has now peaked following sterling’s collapse since the Brexit vote.
“It now seems likely we’ll see the rate steadily fall back towards the 2% target over the next year or so,” Hargreaves Lansdown senior economist, Ben Brettell, said. “Logic has always dictated that once the effect of the weaker pound had percolated into the real economy, it should then start to drop out of the year-on-year calculations 12 months later.” However, James Tucker, a statistician who compiled the figures, said: "It remains too early to say whether today's slight fall is the start of any longer-term reduction in the rate of inflation."
The ONS said the fall in inflation was largely thanks to lower transport costs, particularly for airfares, but warned that it is too early to say that a peak has been reached. This comes after the Bank of England (BoE) raised interest rates from their historic low of 0.25% to 0.5% in November last year. This reversed the decision to cut rates immediately after the UK’s vote to leave the EU, with the Bank previously saying it expected inflation to peak in the final months of 2017. It predicted that the rate would then fall back to around 2.4% by the end of this year, with Brettell saying he does not expect any further interest rate rises over the next 12 months.
Sterling slipped against the US dollar following the announcement, falling 0.2% to 1.37. Against the euro, the pound was broadly flat at 1.12. Yael Selfin, chief economist at KPMG UK, said the inflation fall will provide a “small relief” to households, but oil prices could keep everyday costs higher. She added: “A rise in oil prices together with the lagged effect of sterling’s earlier falls, which is expected to take some time before being fully passed on to consumers, will continue to provide upward pressure on prices.”
A Treasury spokesman said: “We are helping families with their everyday costs of living by banning unfair credit card fees, freezing alcohol and fuel duties, boosting wages and cutting tax bills, as we build an economy fit for the future.”
Resources
1) https://www.ft.com/content/e140ec7e-faa2-11e7-9b32-d7d59aace167
2) http://www.theactuary.com/news/2018/01/fall-in-prices-raises-hope-of-inflation-peak/
4) https://news.sky.com/story/inflation-falls-back-for-the-first-time-since-june-to-3-ons-11209910