U.K. Inflation May Be Starting to Slow

Updated on
  • Consumer-price growth forecast to have eased to 3% in December
  • Spending under pressure because wage growth isn’t keeping pace

Inflation in the U.K. may finally be starting its slowdown, bringing some small relief to consumers squeezed by faster-rising prices in 2017.

Consumer-price growth eased slightly to 3 percent in December, according to a Bloomberg survey of economists before data on Tuesday, which would mark the first decline in the rate in six months. The Bank of England has forecast that it will continue to cool through 2018, though at a moderate pace.

Past its Peak

U.K. price growth probably slowed in December but is still squeezing consumers

Source: Office for National Statistics, Bank of England

Boosted by the pound’s drop after the U.K.’s 2016 vote to leave the European Union, inflation reached 3.1 percent in November, a level not seen in more than five years. Wage growth has failed to keep pace even with unemployment at a 42-year low, draining consumers’ spending power and sapping a key driver of economic growth.

The rate was also more than a percentage point above the Bank of England’s target, meaning Governor Mark Carney must write a letter to Chancellor of the Exchequer Philip Hammond explaining why this is the case. That will be published alongside the bank’s February policy decision, when it will also unveil new economic projections and crucial research on the supply side of the economy.

In its last round of forecasts in November, the BOE said inflation would peak around the end of 2017 then fall steadily back toward the 2 percent goal. That month, the bank raised its key interest rate for the first time in a decade -- to 0.5 percent from 0.25 percent -- and said more hikes might be needed over the coming three years.

The BOE sees inflation at 2.4 percent in the fourth quarter of 2018. Bloomberg Economics predicts an even sharper deceleration to 2.2 percent.

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