Please see the below article from Evelyn Partners which details their thoughts on this morning’s UK inflation announcement for January, received this morning – 19/02/2025.
What happened?
UK annual headline CPI inflation for January was reported at 3.0% (consensus: 2.8), which was higher than December’s reading of 2.5%. In monthly terms, CPI was -0.1% (consensus: -0.3), compared to 0.3% in December.
Core inflation (excluding food, energy, alcohol, and tobacco) was 3.7% (consensus: 3.4%), which was above the prior reading of 3.2%.
What does it mean?
The UK continues to face stickier inflationary pressures compared with other advanced economies. This is arguably reflected in the bond market with gilts yields remaining considerably higher than their European counterparts, despite the UK facing a similarly weak growth profile.
Both the headline and core CPI measures ticked up this month, driven higher by transport, food & non-alcoholic beverages, and education as VAT on private education shows up in the inflation data. Prices also increased in the recreation sector, which could have been driven by companies getting ahead of the rise in National Insurance contributions. Services inflation, which represents a better gauge of domestically generated inflation than headline CPI, also accelerated from 4.4% to 5%. Although it was slightly softer than the 5.1% estimated by consensus.
This CPI print undoubtedly complicates the Bank of England’s job. Last week’s GDP data confirmed the UK economy is barely growing, and the Bank increased its CPI forecast on the back of higher global energy prices. This combination of low growth and above-target inflation is a challenging mix for the Bank to navigate. They will be hoping that higher energy costs and tax rises will not lead to new inflationary spiral. It’s likely they will look to maintain restrictive policy to reduce the probability of this scenario materialising. The risk is that they further weaken the already fragile domestic demand. In our view, the growth risks will outweigh the inflation risks over the coming quarters, and the Bank will continue its interest cutting cycle.
As the gilt market opened there was a bit of pressure on front end yields. There was a limited reaction in foreign exchange markets, with the pound slightly weaker against the dollar. Similarly, money markets took the news in their stride, continuing to expect two interest rate cuts in 2025.
Bottom Line
January’s CPI inflation print came in higher than expectations. With higher energy prices forecast over the coming quarters, the Bank will have to balance the risks of low growth and above-target inflation. In our view, the growth risks outweigh the inflation risks, and the Bank will continue its interest cutting cycle over the coming quarters.
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Charlotte Clarke
19/02/2025