UK inflation falls to two-year low in January

UK inflation fell to a two-year low in January, dragged lower by falling energy bills and fuel.

The Office for National Statistics said the Consumer Prices Index (CPI) was 1.8% last month, from 2.1% in December.

Inflation peaked at a five-year high of 3.1% in November 2017, and was last at 1.8% was in January 2017.

Mike Hardie, ONS head of inflation, said: "The fall in inflation is 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."

Consumers in the UK have been pressured by inflation since the Brexit referendum in June 2016 after a slump in sterling of more than 10% against the dollar and euro. "For the past two years, households have been squeezed between high prices and weak wage growth. With inflation now at a two-year low and growing upward momentum in pay packets, consumers are likely to feel less of a pinch on their wallets.

He said falling inflation alongside rising earnings was "delivering a powerful uplift to spending power"

Some economists think it is unlikely that inflation will fall much more. For instance, Ofgem's energy price cap may not suppress inflation for long, as the cap is due to rise in April.

That difference has now almost closed but economists warn that inflation could return in the event of a no-deal Brexit. According to Howard Archer, chief economic advisor to the EY Item Club, assuming there is a Brexit deal, he said inflation could stay below 2% this year - and even dip to 1.6%.

If there is not a deal, Mr Archer said the picture would be different and the Bank of England could cut interest rates as "economic activity would likely take a significant hit".

Resources:

https://www.rte.ie/news/business/2019/0213/1029295-uk-inflation-rate/

https://www.bbc.co.uk/news/business-47224913