U.K. Inflation Unexpectedly Slows to Below BOE TargetEmma Charlton
U.K. inflation unexpectedly cooled in January, slowing to below the Bank of England’s 2 percent target for the first time since November 2009.
Consumer prices rose an annual 1.9 percent, down from 2 percent in December, the Office for National Statistics said today in London. The median of 33 estimates in a Bloomberg News survey was for it to remain unchanged. The largest downward contribution came from DVDs, museum entry fees, household goods and alcohol.
The BOE forecasts that inflation will remain close to its goal over the next three years and that price expectations remain well anchored. Coupled with the spare capacity in the economy, Governor Mark Carney sees scope for the Monetary Policy Committee to keep interest rates at a record-low for some time, and policy maker David Miles said in a Bloomberg interview yesterday there isn’t a case to begin tightening now.
“Inflation is likely to remain soft for several months,” said James Knightley, an economist at ING Bank in London. “We do expect to see an uptick later this year with a strengthening labor market likely prompting a gradual rise in wages over coming quarters, but it is not going to be troubling for the BOE. This means that they can continue focusing on ensuring the economic recovery continues.”
Today’s report showed that consumer prices fell 0.6 percent in January from December, the biggest monthly decline since January 2009. The core annual inflation rate slipped to 1.6 percent from 1.7 percent, the lowest since June 2009.
The pound extended its decline against the dollar immediately after the data before recovering. It was at $1.6699 as of 11:05 a.m. London time, down 0.1 percent from yesterday. Sterling has advanced 6.7 percent in the past six months.
The BOE last week lowered its forecast for inflation while raising its projections for growth, and Miles said the changes in the view on prices were informed by currency movements. He also said the U.K. economy probably has more spare capacity than the central bank’s main calculations show, indicating his support for continuing loose policy.
“There is a material amount of slack,” Miles said. “We don’t see a case for tightening right now.”
The BOE will publish the minutes of the Monetary Policy Committee’s February meeting tomorrow, which will give more clarity on officials’ thinking after they revamped their forward-guidance policy last week.
“With the pound having strengthened and little sign of any pipeline pressures, we expect inflation to remain below 2 percent well into next year, boosting households spending power and helping to sustain the recovery,” Andrew Goodwin, an economic adviser to the EY ITEM Club. “This, in turn, should give the MPC cover to pursue its aim of keeping rates low.”
Retail-price inflation, a measure used in wage negotiations and as a basis for the inflation-linked bond market, accelerated to 2.8 percent in January from 2.7 percent in December. Inflation by that measure excluding mortgage-interest costs was also 2.8 percent.
The statistics office also said that gas and electricity tariffs made “very little contribution” to the annual consumer-price inflation rate, with recent increases and reductions canceling each other out.
Separate data showed that pipeline price pressures remain subdued. Input costs for factories fell 0.9 percent in January from the previous month and were down 3.1 percent from a year earlier, the biggest annual drop since September 2009. The decline on the year was largely due to crude oil.
The data also showed that factory-gate prices rose 0.3 percent on the month and 0.9 percent on the year in January.
“The inflation environment is more benign than we had anticipated,” Carney said on Feb. 12 as the BOE published new forecasts. “Global inflation is subdued” while “commodity prices have fallen, and sterling has appreciated by 10 percent since its March trough. All of these developments will hold back imported inflation pressures.”
In a further sign of strength in the property market, the ONS reported annual house-price growth accelerated to 5.5 percent in December from 5.4 percent in November. In London, prices surged 12.3 percent.