Please see below article received from Evelyn Partners this morning, which provides their thoughts on this morning’s UK inflation announcement for January.
What happened?
UK January annual headline CPI inflation came in lower than expected at 4.0% (consensus: 4.2%), versus 4.0% in December. In monthly terms, CPI was -0.6% (consensus: -0.3%), compared to 0.4% in December.
Similarly, core CPI inflation (ex energy, food, alcohol and tobacco) came in at 5.1% (consensus: 5.2%) vs 5.1% in December. In monthly terms, core CPI was -0.9% (consensus: -0.8%), compared to a rise of 0.6% in December.
What does it mean?
The broad downward trend in inflation is continuing, as disinflationary pressures are likely to drive the rate down towards the Bank of England’s (BoE) target of around 3% in Q4’24.
In the data, upside to inflation was driven by a roughly 5% increase in the Ofgem cap on household energy that fed through to gas and electricity prices. On the downside, goods price disinflation continues as retailers offer discounts at the start of the year, as seen in monthly falls from both furniture/household goods and food/non-alcoholic beverages CPI categories.
On balance, upside inflationary risks appear to be contained. First, wage rates are slowing and that is putting downward pressure on services inflation. Providing that headline CPI inflation continues to slow there will likely be less demand for higher wage rates. In other words, this reduces the circular risk of an upward spiral in wages and inflation.
Second, so far there is little sign of a significant pick-up in consumer prices from supply chain disruption and rising shipping costs caused by Houthi attacks in the Red Sea. Energy prices are also stable: Brent crude oil is still falling on a year-on-year basis. This reduces the risk of upside in retail petrol and diesel fuel prices.
Third, lead indicators point to more disinflation ahead. Given their statistical relationship with underlying producer prices, both core goods CPI inflation and services inflation are set to come down over the coming months. For instance, core goods CPI prices could well be flat on a year-on-year basis by the Spring from rising around 2%.
Bottom Line
The broader trend of inflation deceleration is continuing. Importantly, headline CPI inflation is running slightly below the BoE’s forecasts over the last few quarters. This supports the narrative that we have reached the end of the interest rate hiking cycle. Expect the BoE to cut interest rates in the coming months and provide some support to the gilt market.
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Chloe
14/02/2024