UK inflation slows further than expected and could return to 2% by autumn


Ernst & Young (EY) predict UK inflation could reach almost 3% by the end of the year and Citigroup forecasts it could return to 2% by autumn, helped by a continued decline in wholesale energy prices.

Consumer Price Index (CPI) inflation continued to fall in January due to lower air fares, another significant fall in petrol prices, and strong base effects weighing on core inflation.

Citi Group said today (Wednesday) that consumer price inflation was likely to fall to 2.3 per cent in November, well below the Bank of England’s forecast that it would remain around 4 per cent in the fourth quarter of the year.

According to the FT, this is good news for Prime Minister Rishi Sunak, “potentially making it easier to resolve public sector strikes over pay and to fulfil his pledge of halving inflation by the end of the year.” The inflation rate in January was 10.1 per cent.

Citi’s Chief UK Economist Benjamin Nabarro said the sell-off in European gas prices had prompted the Bank of England to republish its inflation forecasts. He says he now expects UK headline inflation to slow to below 5 per cent from July.

Martin Beck, chief economic advisor to the EY ITEM Club, says:

“Consumer Price Index (CPI) inflation surprised on the downside in January, falling to 10.1% from 10.5% in December. Around half of the fall in the annual rate – and the source of the downside surprise – was due to lower prices in the volatile air transport category. There was also a lower contribution from petrol than expected, with pump prices having fallen significantly for a second successive month in January. The remainder of the fall came from lower core inflation, although this was partly due to base effects following a large month-on-month increase in the previous January.

“Though January’s soft reading was heavily influenced by temporary factors, the outlook for inflation in 2023 has continued to improve in recent weeks, with wholesale energy prices declining further. This should mean that the typical household energy bill falls to around £2,300 in July from £3,000 at present. Combined with powerful base effects, this would mean that the contribution of the energy sector to inflation would fall from its current 3.2ppts to zero in the latter part of this year. Though there will be some offsetting forces – including the continued pass through of higher energy and labour costs for businesses – the EY ITEM Club now expects CPI inflation to slow to as low as 3% by the end of the year.

“Today’s data add to the uncertainty around whether the Bank of England will increase Bank Rate again in March. The Monetary Policy Committee (MPC) has expressed concerns about the strength of private sector regular pay growth and services inflation. While the former came in strongly again in yesterday’s labour market release, the latter was much softer in today’s data, falling to 6.0% in January from 6.8% in December. The fall in air fares and base effects played major roles in the lower reading, but the data emphasise that the positioning of the MPC for March’s decision is still in the balance.”


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