UK inflation at lowest level since March 2017

Inflation eased to a 20-month low in November, as a planned rise in the cost of tobacco was offset by falling prices at the petrol pump.

According to the Office for National Statistics, the consumer prices index was 2.2% in November, down from 2.3% in October and the lowest since March 2017. Including home occupiers’ housing costs, the rate was 2.2%, unchanged on the previous month.

Core inflation, which strips out volatile energy prices, eased to 1.8% from 1.9%.

The changes were in line with economists’ expectations.

Mike Hardie, head of inflation at ONS, said: “Inflation was little changed as falling petrol prices, thanks to a substantial drop in the cost of crude, were offset by rises in tobacco prices following the duty changes announced in the Budget.” There were also falls in the costs of toys and hobbies, including video games.

The ONS also said on Wednesday that house prices in the UK had continued to grow, but with the smallest annual rise since July 2013. UK average house prices rose by 2.7% in the year to October 2018, down from 3% in September.

The lowest annual growth was in London, where prices were down 1.7%, although that was a marginal improvement on the 1.8% decline in the year to September.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The drop in CPI inflation marks the beginning of a sharp fall over the coming months, which will be driven primarily by lower energy prices. Energy’s contribution to the headline rate fell to 0.5 percentage points in November, from 0.7pp in October, as the decline in oil prices began to filter through to petrol pumps.

“Energy’s contribution should fall to 0.4pp in December and then to just 0.2pp in January, when Ofgem will introduce its price cap on standard variable tariffs for electricity and natural gas.”

Tom Stevenson, investment director for personal investing at Fidelity International, said: “Brexit uncertainty and flagging consumer confidence are showing up in increasingly soggy data. Retailers are being forced into heavy discounting to persuade shoppers to open their wallets, offsetting the inflationary impact of the weaker pound.

“However it’s not all bad news, as last week’s ONS earnings data showed that the UK wage growth had risen to a healthy 3.3%. UK households are getting progressively better off.

“If wages continue to outstrip slowing inflation, there will be even less incentive for the Bank of England to hike rates. The Bank is likely to remain cautious, particularly as the chances of a no-deal Brexit rise.”

The Bank of England rate-setting Monetary Policy Committee meets on Thursday. It’s target for inflation is 2% but it economists do not expect the Bank to increase interest rates again this year.

Naeem Aslam, chief market analyst at Think Markets UK, said: “Sterling moved slightly lower on the bank of the UK’s inflation numbers, as this has reduced the chances of the Bank to show its hawkish hand in its policy meeting tomorrow.”

However, Pantheon Macroeconomics’ Tombs added: “Modestly below-target inflation will not stop the MPC from hiking the bank rate next year, as the Committee believes that interest rates still are well below neutral levels and that no spare capacity exists. As such, we continue to expect the MPC to increase the bank rate to 1.25% by the end of next year, form 0.75% currently.”

David Cheetham, chief market analyst at xtb, said: “While this decline [in CPI] was expected, it provides further evidence that the spike inflation caused by the depreciation in the pound following the Brexit referendum has passed.

“In terms of market reaction, it has been understandably muted, with economic data clearly having taken a back seat of late as far as driving the pound is concerned, with traders far more interested in the latest Brexit developments.”