People shop on Oxford Street, in London, on April 10, 2023.ANNA GORDON/Reuters
British inflation unexpectedly held steady at 4.0 per cent in January, defying forecasts of a rise, official data showed, offering relief for the Bank of England (BoE) and Prime Minister Rishi Sunak too ahead of a national election expected this year.
Economists polled by Reuters had expected an increase in the annual rate to 4.2 per cent.
Consumer price inflation – which surged as high as a 11.1 per cent in October, 2022 – is expected to fall further in the coming months, paving the way for the BoE to start cutting borrowing costs from their 16-year high.
Sterling weakened against the dollar and the euro after the inflation data was published.
Investors added to their bets on the BoE cutting interest rates this year, putting a roughly 72-per-cent chance of a first reduction coming in June, compared with only a 40-per-cent chance on Tuesday after a surprise jump in U.S. inflation.
“Over all, the latest inflation data should reassure the Monetary Policy Committee that the time to start cutting interest rates is approaching,” said Martin Beck, chief economic adviser to the EY ITEM Club.
Britain’s core inflation, which excludes volatile food, energy, alcohol and tobacco prices, was also unchanged at 5.1 per cent, the Office for National Statistics said.
Services inflation – an indicator of domestic price pressures – rose to 6.5 per cent from 6.4 per cent in December but was not as strong as the BoE had expected.
The British central bank fears rapid wage growth – which makes up much of the inflation rate in the services sector – could add more inflationary pressure across the economy.
Data published on Tuesday showed regular wages rose by an annual 6.2 per cent in the last three months of 2023, the slowest increase in more than a year but about double the pace the BoE views as consistent with getting inflation back sustainably to 2 per cent.
“Inflation never falls in a perfect straight line, but the plan is working,” Finance Minister Jeremy Hunt said. “We have made huge progress in bringing inflation down from 11 per cent and the Bank of England forecast that it will fall to around 2 per cent in a matter of months.”
MPC member Jonathan Haskel, one of two policy makers who voted to raise interest rates at the BoE’s most recent meeting, last week told Reuters he would need to see more evidence of inflation pressures weakening before changing his stance.
Samuel Tombs, an economist with Pantheon Macroeconomics, estimated on Wednesday that a gauge of core services prices that the BoE is watching closely rose by a modest 1.2 per cent month-on-month. Mr. Tombs had initially said the measure fell, which could have been evidence of inflation pressures weakening, but corrected his estimate.
In further welcome news for consumers, food inflation fell for the first time in monthly terms since September, 2021, dropping by 0.4 per cent from December.
High inflation has affected British households’ living standards over the past couple of years, contributing to the electoral challenge facing Mr. Sunak, whose Conservative Party is lagging far behind the opposition Labour Party in opinion polls.
Separate ONS data added to signs of weaker inflation pressures ahead as prices paid by manufacturers fell by an annual 3.3 per cent, the biggest fall since May, 2020. The prices they charged also dropped, down by 0.6 per cent, the biggest fall since November, 2020.
The weakening inflation outlook is likely to help Britain’s economy grow moderately in 2024, although official data on Thursday are likely to show that it slipped into a shallow recession in the second half of 2023, according to the analysts polled by Reuters.