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UK inflation holds steady at 4%

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UK inflation stayed steady at 4 per cent in January, undershooting expectations and bolstering hopes that the Bank of England will soon feel it has enough evidence of price pressures easing to cut interest rates.

Consumer prices rose at an annual rate of 4 per cent in January, the same rate as in December, the Office for National Statistics said on Wednesday. Analysts had expected an uptick to 4.2 per cent, slightly above the BoE’s forecast of 4.1 per cent.

Core inflation — excluding energy, food, alcohol and tobacco — also remained steady at 5.1 per cent.

Services inflation, which is closely monitored by policymakers as a better measure of domestic price pressures, edged up slightly from 6.4 per cent to 6.5 per cent but this too was slightly lower than expected.

Grant Fitzner, ONS chief economist, said upward pressures, including the increase in the cap on household energy bills and the first rise in second-hand car prices since May, had been offset by lower prices for furniture and household goods and the first monthly drop in food prices for two years. Staples such as bread were the biggest driver of this drop.  

The figures will be a boost for Jeremy Hunt, the chancellor, as he finalises what could be the last Budget statement before the election expected this year. Hunt said they showed “we have made huge progress in bringing inflation down”, although unions said the cost of living crisis was still “hammering households in every corner of the country”.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the data was “further evidence that the UK is close to winning its fight against soaring inflation”, with a sizeable drop in energy bills pending in April that was “likely to drag inflation noticeably lower by the spring”.

The BoE published new forecasts this month showing inflation — which peaked at 11.1 per cent in October 2022 — would return to its 2 per cent target “temporarily” in the second quarter of 2024 but then increase during the rest of the year.

But Huw Pill, BoE chief economist, said last week that price growth would not need to return all the way to 2 per cent for the central bank to start cutting interest rates from their current level of 5.25 per cent, since policy would still be restrictive even after a downwards move.

The UK data comes a day after the release of figures showing US inflation eased less than expected in January, hitting hopes that the Federal Reserve might start cutting interest rates as soon as May.

Sterling nudged lower after the figures, with the pound sliding 0.2 per cent to $1.2565.

Additional reporting by Mary McDougall

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