UK inflation falls to 2-yr low, offers relief to households before Brexit

Consumer prices rose at an annual rate of 1.8%, down from December's 2.1%, as a new government cap on household power bills kicked in

British inflation fell to a two-year low in January, dipping below the Bank of England's target and offering some relief to consumers who have tightened their belts ahead of Brexit.

Consumer prices rose at an annual rate of 1.8 per cent, down from December's 2.1 per cent, as a new government cap on household power bills kicked in.

A Reuters poll of economists had forecast 1.9 per cent.

British consumers have been pressured by inflation caused by the slump in sterling against the dollar and euro after the Brexit referendum in June 2016.

Inflation peaked at a five-year high of 3.1 per cent in November 2017, when households faced much greater price increases than the European Union average.

That difference is now negligible, helping the Bank of England as it holds off on fresh interest rate hikes pending the outcome of Britain's Brexit stand-off with the rest of the EU.

"The further falling back in inflation facilitates the Bank of England maintaining a 'wait and see' approach on interest rates until after the UK leaves the EU," Howard Archer, chief economic adviser to the EY ITEM Club consultancy, said.

British government bond prices rose after the data, pushing 10-year yields down by 2 basis points.

But Allan Monks, an economist with JP Morgan, said the impact of the power price cap would be short-lived because tariffs were likely to rise by around 10 per cent in April.
 

"Unlike when the cap is lowered, energy firms don't have to automatically raise prices when the cap is lifted. But we expect they will," Monks said.

On Wednesday, npower became the third of Britain's six major energy providers this week to say it would raise prices from April.

Last week the BoE said inflation was likely to fall below 2.0 per cent in coming months before picking up again.

Despite the fall in inflation since late 2017 and the fastest wage growth in a decade, businesses have reported a downturn in consumer spending in recent months.

Surveys show households are worried, with Britain on course for a no-deal departure from the EU on March 29 unless Prime Minister Theresa May can broker a revised deal with the EU that would be accepted by her divided party and parliament.

Wednesday's figures from the Office for National Statistics suggested less short-term inflation pressure in the pipeline.

Manufacturers' raw materials costs were 2.9 per cent higher than in January 2018, the slowest increase since June 2016, the month of the Brexit referendum. Economists polled by Reuters had expected input prices to rise by 3.8 per cent.