Inflation comes in below expectations at four per cent thanks to falling food prices
The first monthly fall in food prices in over two years helped inflation undershoot economists’ expectations in January despite higher energy costs, new statistics show.
According to figures from the Office for National Statistics (ONS), the consumer price index (CPI) stood at four per cent in January, undershooting City expectations of an increase to 4.2 per cent .
Core inflation – which strips out volatile components and is seen as a more accurate gauge of inflationary pressures – was also flat at 5.1 per cent. Economists expected it to rise to 5.2 per cent.
“Inflation was unchanged in January reflecting counteracting effects within the basket of goods and services,” chief economist at the ONS Grant Fitzner said.
Although gas and electricity prices rose due to an increase in the energy price cap, Fitzner noted that the prices of household goods, particularly leather settees and carpets, fell by more than last year.
Monthly prices for food and non-alcoholic drinks meanwhile fell by 0.4 per cent, the first fall in prices since September 2021.
Suren Thiru, Economics Director at ICAEW, said “this softer than expected out-turn is further evidence that the UK is close to winning its fight against soaring inflation”.
The pound lost about 0.2 per cent lower against the dollar to trade at $1.257 following the news.
There will be lingering concerns over the slight increase in services inflation, which increased to 6.5 per cent from 6.4 per cent in December, but this was also below the Bank of England’s forecast. Services inflation is a crucial measure of domestic inflationary persistence.
Chancellor Jeremy Hunt said: “Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11 per cent”.
Inflation has fallen fairly rapidly in the past few months and is expected to continue falling in the months ahead. The Bank of England’s forecasts suggest inflation will return to two per cent in the second quarter of this year, aided by a sharp fall in energy prices.
The steep drop has prompted policymakers to signal that rate cuts might be in the offing later this year. Huw Pill, the Bank’s chief economist, confirmed that cuts were a “when rather than an if.”
After four consecutive holds, the benchmark Bank Rate currently stands at 5.25 per cent, having been raised from 0.1 per cent in late 2021.
However, policymakers have pushed back against any imminent easing in monetary policy, warning that domestic inflationary pressures remain elevated.
Figures out yesterday showed wage growth remained stubbornly high. Regular pay fell to 6.2 per cent in the final quarter of last year, above the Bank of England’s own forecast of six per cent.
Unemployment meanwhile was also lower than expected, falling to 3.8 per cent. This points to the possibility of continued wage pressures due to a tight labour market.
Markets expect the Bank of England to start cutting interest rates in June with three rate cuts expected over the course of the year.