Energy cap pulls inflation below Bank of England's target
Inflation nudged below the Bank of England’s 2% target for the first time in two years in January, official figures showed on Wednesday, as energy prices eased.
The Consumer Price Index, which includes owner-occupiers’ housing costs, was 1.8% last month, down from 2% in December. Analysts had been looking for a slightly smaller decline, to 1.9%.
The Office for National Statistics said that the largest downward contribution was from electricity, gas and petrol. Gas prices saw their largest one-month decrease since records began in 1988 following the introduction of a price cap on standard variable tariffs by regulator Ofgem.
That fall in energy prices was partially offset by rising ticket prices for ferries and by air fares, however, which saw prices fall but by less than a year earlier.
The core rate of inflation, which strips out more volatiles components such as energy, was unchanged at 1.9%.
Naeem Aslam, chief market analyst at Think Markets UK, called it “another bad set of economic date for sterling”.
He continued: “This makes the odds lower for the Bank of England to think of hiking the interest rate any time soon. Sterling has been under immense selling pressure because of the Brexit uncertainty and the weakness in the economic data is only making matters worse.”
Ben Brettell, senior economist at Hargreaves Lansdown, said: “In truth, today’s numbers aren’t going to change the Bank of England’s thinking about the economy or interest rates.
“An interesting note is the continued breakdown of the relationship between the labour market and inflation. Theory dictates that a tight labour market – low unemployment and higher wage growth – should lead to higher inflation. This means policymakers face a straight trade-off between inflation and unemployment. But at present the inflation genie is still firmly in the bottle, despite unemployment at multi-decade lows.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the fall below 2% was good news for households, but “a further substantial fall isn’t likely”.
He added: “All told, CPI inflation looks set to remain marginally below the 2% target this year, though the later timing of Easter than in 2018 will cause the headline rate to jump temporarily in April.
“Past experience shows, however, that low inflation won’t stop the Monetary Policy Committee from raising the bank rate later this year if, as we expect, the economy regains some momentum following relief that a no-deal Brexit has been averted.”
Ian Stewart, chief economist at Deloitte, said: “Together with rising earnings, [falling inflation] is delivering a powerful uplift to spending power. Brexit dominates at the moment, but were Brexit risks to ease, consumers would be well placed to hit the high street.”