UK inflation on track to hit 2% by Spring

Stabilising: After the small upside surprise in US January inflation data yesterday triggered a bout of selling across global equites, we had waited for the UK release this morning with bated breath. Did the data surprise? Yes. Fortunately, however, it was in the right direction. Headline inflation based on the consumer price index (CPI) rose by 4.0% yoy in January, unchanged from December but below Bloomberg consensus expectations of 4.1%. On a mom basis, headline inflation declined by 0.6%, more than offsetting the small 0.4% gain in December and a bigger fall than the 0.3% drop predicted by consensus. A 0.9% mom decline in core inflation, which strips out volatile food and energy prices, kept the annual rate of core inflation unchanged at 5.1% yoy – consensus had expected the annual rate of core inflation to rise a notch to 5.2%.

Mind the base effects: Due to the rapid acceleration in price growth through 2022 and H1 2023, yoy inflation rates remain inflated by base effects – and hence give a distorted picture of the recent trend in prices. In Charts 1a and 1b we compare yoy and six-month annualised calculations of headline and core inflation. The charts show that while the yoy change remains well above the Bank of England’s (BoE) 2% target for both aggregates the picture is completely different on a six-month basis. With almost no change in the overall price level between August and January, six-month annualised inflation has hovered around 1% in the previous three prints. Even the six-month annualised calculation of core inflation, which better captures underlying price pressures, dropped to slightly below 1% in January. Short of another major supply shock to prices, yoy rates of headline and core inflation look set to fall rapidly further over coming months as base effects fully wash out. We expect headline yoy inflation fall to 2% in spring and to slightly below 2% through Q3. Today’s inflation print keeps the BoE on track for five cuts in 2024 starting in June.

Broad-based disinflation: Despite a 0.8% mom decline, the annual rate of services price growth edged slightly higher to 6.5% from 6.4% in December (Chart 2). However, this was still well below the 6.8% yoy rise expected by consensus after the small uptick in household energy prices. Housing and household energy prices rose by 1.8% mom. Goods prices rose at a normal 1.8% yoy rate in January after a 0.4% mom fall. Looking at the details, prices declined mom in six of the twelve main categories of the CPI index, with sizeable declines in clothing and footwear (-3.9% mom), furniture and household goods (-3.1% mom) and transport (-2.8% mom). Producer prices continued to decline on trend at the start of the year – Chart 3. Input prices declined by 3.3% yoy (-0.8% mom) while output prices fell by 0.6% yoy (-0.2% mom).

Kallum Pickering
Senior Economist, Head of ESG & Data, Director

Mobile +44 791 710 6575

Phone +44 203 465 2672

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