Inflation slows to lowest level for three years
Inflation eased to a three-year low in December, fuelling speculation that the Bank of England could move to cut interest rates later this month.
The Office for National Statistics said the the consumer prices index 12-month rate was 1.3% in December, compared to 1.5% in November. The lowest reading since November 2016, it was also below consensus for no change. The figures were weighed down primarily by weakness in accommodation services and clothing.
Including owner occupiers’ housing costs, the rate declined to 1.4% from 1.5% in November. Here the largest contributions came from housing, water, and electricity, gas and other fuels.
Core inflation, which strips out all volatile components, was 1.4%, well below the expected no change on November’s 1.7%.
Mike Hardie, head of inflation at the ONS, said: "Inflation eased in December, as prices for hotel stays dropped. Women’s clothing prices also fell, with more items being discounted."
The decline is likely to increase speculation that the Bank - which has a target of 2.0% for inflation - will move to cut interest rates when the Monetary Policy Committee next meets on 30 January.
Ayush Ansal, chief investment officer at Crimson Black Capital, said: "Coming after a triple whammy of weak retail sales and slowdowns in both the manufacturing and service sectors, this surprise fall will arguably put the doves in the driving seat at the Bank; when the MPC meets this month, the possibility of an interest rate cut will now be firmly on the table.
"With the UK economy stuttering, the Bank could conclude that it’s better to get ahead of the curve on rates rather than risk playing catch up.2
Neil Wilson, chief markets analyst at Markets.com, said: "This gives the Bank all the excuse it needs to cut. Coming off the back of weaker GDP and industrial production numbers, it does not look as though the economy was firing on all cylinders at the tail end of last year. While there may well be a ‘Boris Bounce’ in the offing, I rather think the die is cast in favour of a rate cut."
The pound came under pressure immediately after the data was published and was trading 0.18% lower against the euro at €1.1679 by 1015 GMT.
However, not all commentators agreed. Robert Alster, head of investment services at Close Brothers Asset Management, said: "A relatively mediocre Christmas trading period may go some way to explain why inflation is still languishing below its 2.0% target. Retail footfall is said to have dropped by 2.5% throughout December, highlighting the challenging environment.
"However, with Brexit-linked uncertainty improving and wage growth outstripping inflation, CPI could soon creep close to target. This might make a rate cut more unpalatable."
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The sharp fall in CPI inflation shouldn’t be a game-changer for the MPC, which had anticipated a 1.4% print in November’s Monetary Policy Report.
"Looking ahead, CPI inflation looks set to rebound to about 1.6% in the first quarter, as airline fares inflation mean-reverts and the anniversary of last year’s cut in electricity and natural gas prices is met. But it will fall sharply in the second quarter, probably to about 1.3%, when Ofgem likely will lower its cap on standard variable tariffs.
"Meanwhile, both food and core goods inflation likely will edge down over the course of this year, in response to sterling’s modest appreciation.
"The MPC, however, likely will remain focused on domestically generated inflation, which we expect to return to its rising trend in response to a tight labour market and likely pick up in the GDP growth in the first half. We continue to think, therefore, that the MPC will hold back from cutting the bank rate this year."