Search Share Prices
CPI dips to suggest UK inflation may have peaked
UK inflation retreated slightly last month, reducing pressure on the Bank of England over interest rates.
The consumer price index for December fell to an annual rate of 3.0% from 3.1% the previous month, which had largely been forecast by economists. On a month-on-month basis, CPI rose 0.4%, as expected, after a 0.3% increase a month earlier.
Core CPI, which excluded more volatile prices such as food and energy, rose 2.5% year-on-year, less than the 2.6% expected and the prior month's reading of 2.7%.
The Office for National Statistics said December's growth of CPIH, its preferred measure of inflation as it includes owner-occupiers' housing costs, fell to 2.7%, in line with the consensus forecast, and down from 2.8% a month before.
Oil prices were the biggest driver of change in input producer price inflation over 2017, with the majority of the 12-month growth rate being affected by base effects, leading to CPI growing more quickly than in France, Germany and the EU as a whole over 2017.
Noting that inflation has been running at roughly the same rate since spring 2017 after spiking on the back of the pound's collapse after the European referendum, the ONS said it was "too early to say" whether December's slight fall is the start of any longer-term reduction in the rate of inflation.
""Increasing costs of tobacco and chemicals, partially offset by slowing petroleum price rises, helped push up the price of goods leaving factories. However, there was a slowdown in the increase in raw material costs, mainly due to falling crude oil prices," said senior ONS statistician James Tucker.
Several economists saw this is marking the start of CPI beating a retreat, taking the pressure off the Bank of England, though governor Mark Carney will still have to send an explanatory open letter to the Chancellor next month after headline CPI broke above 3.1% in November, more than one percentage point above the BoE's 2% target.
Economist Amit Kara, UK macro forecasting chief at the National Institute of Economic and Social Research, said: "We think that inflation has now peaked and will gradually drop back towards the 2% target, provided that monetary policy is set appropriately.
"Economic growth appears to have gathered momentum in the final quarter of 2017 at home and abroad and this strengthens our view that the Bank of England will raise the policy rate again in May and every six months until Bank Rate reaches 2% by mid-2021."
The pound fell slightly on data's suggestion that UK inflation may have peaked, said analyst David Morrison at GKFX said. "The pound surged higher at the end of last week in a move which saw the GBPUSD break above resistance around 1.3600 to hit its highest level since its post-referendum sell-off in June 2016. If it manages to hold on to recent gains and consolidate above 1.3600 (now support) then sterling bulls see 1.4000 as an achievable upside target."
Sam Tombs at Pantheon Macroeconomics saw reassuring signs that CPI inflation has peaked and the worst effects of sterling's depreciation have passed, with food inflation falling to 3.9% from 4.1% a month earlier, while core goods inflation held steady at 2.5%, below August's peak of 2.8%.
"Past movements in sterling suggest that food and core goods inflation will decline to about 2% and zero by the end of 2018, respectively, subtracting 0.2pp and 0.8pp from the headline rate," he said, with services inflation excluding airline fares down to 2.8% in December from 3.2% in November and well below the 3.7% average between 1997 and 2007.
"The continued weakness of underlying price pressures means that the MPC has little need to rush the next rate hike," Tombs said.