The UK’s inflation rate slowed for a third month but remained stubbornly in double digits five times above the Bank of England’s targeted level.
(Bloomberg) — The UK’s inflation rate slowed for a third month but remained stubbornly in double digits five times above the Bank of England’s targeted level.
The Consumer Prices Index rose 10.1% from a year ago in January, the lowest since September, and down from 10.5% the month before and a 41-year high of 11.1% in October. Economists had expected a slight slowdown to 10.3%.
BOE Governor Andrew Bailey hopes that inflation will fall sharply this year as energy prices ease and the economy tips into recession. While the BOE is concerned that a shortage of workers is pushing up wages and threatening an inflationary spiral, this month’s figures give policy makers room to wait before considering the next move on rates.
“Falling inflation may not be enough to change the course of monetary policy,” said Yael Selfin, chief economist at KPMG UK. “Continuing strong wage pressures add to the risk that inflation becomes more entrenched and persistent, making the bank more reluctant to pivot to a new strategy.”
Money markets pare rate hike wagers aggressively, pricing a 4.55% peak by September compared to 4.69% on Tuesday.
What Bloomberg Economics Says …
“The key detail in the UK’s January’s CPI report was the sharp fall in services inflation. That will matter more for the Bank of England’s next policy decision than the drop in the headline rate. If further evidence emerges in next month’s labor market and CPI releases that domestically generated inflation has turned a corner, it could be enough for the central bank to keep rates on hold on March 23. That would mean the BOE pauses one month earlier than we currently expect.”
—Dan Hanson, Bloomberg Economics. Click for the REACT.
Chancellor of the Exchequer Jeremy Hunt welcomed the dip but said the government will work toward cutting inflation in half this year.
“While any fall in inflation is welcome, the fight is far from over,” Hunt said in a statement. “High inflation strangles growth and causes pain for families and businesses.”
The decline in the latest month was largely due to falling petrol prices along with easing price pressures in restaurants and cafes. That was partly offset by a jump in the cost of alcoholic beverages and tobacco. Air and coach travel costs fell back after a steep rise in December.
“The cost of furniture decreased by more than this time last year, in line with traditional New Year discounting,” ONS Chief Economist Grant Fitzner. “There are further indications that costs facing businesses are rising more slowly, driven by falls in crude oil, electricity and petroleum prices. However, business prices remain high overall, particularly for steel and food products.”
Core inflation, excluding energy, food, alcohol and tobacco, fell to 5.8% in the 12 months to January 2023 from 6.3%. Inflation in the services sector, which is closely watched by the BOE, slowed to 6% from 6.8%. Food costs jumped 16.8%, holding at a record high.
“While this morning’s print is a small step in the right direction, the Bank of England still faces a very long journey to get inflation back to target,” said Hugh Gimber, global market strategist at JPMorgan Asset Management. “Absent a rapid improvement in labor supply, UK activity will need to slow further to reduce underlying inflationary pressures.”
A separate analysis by the ONS showed that inflation was hitting low-income households hardest. They spend a greater proportion of their income on food and energy and saw prices rise 11.3% over last year, more than the 10% gain experienced by high-income households.
Inflation has peaked across the developed world, but remains higher than average in the UK. It stands at 9.2% in Germany, 7% in France and 6.4% in the US.
The Bank of England expects a rapid fall inflation over 2023 after the pullback in energy prices, reaching 4% by the end of the year. That’s still double the 2% rate the BOE targets.
“Another fall in inflation over January suggests that the tide is turning on price pressures,” said Alpesh Paleja, lead economist for the Confederation of British Industry. “But with inflation and pipeline cost pressures set to remain high this year, households and businesses are likely to feel the pain for a while yet. In particular, the continued strength in more domestic measures of inflation will keep alarm bells ringing at the Bank of England.”
Factory gate prices also continued to cool, rising 13.5% in the 12 months to January from 14.6% the previous month. That could signal that a further easing in price pressures are in the pipeline for households.
Energy and passenger transport were given new weights in the ONS’s annual update of its shopping basket. It changes the weights of items in its basket to reflect the latest consumer shopping habits with households spending more on transport and culture after the end of lockdowns and energy bills.
–With assistance from Andrew Atkinson, Eamon Akil Farhat, Libby Cherry and James Hirai.
(Correct core inflation rate in 10th paragraph)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.