Consumer & Producer Prices (Dec.) - Capital Economics
UK Economics

Consumer & Producer Prices (Dec.)

UK Data Response
Written by Ruth Gregory

December’s consumer price figures showed that after a brief pause in November, inflation is back on a downward trend. This is likely to push the Monetary Policy Committee even closer towards a rate cut.

Fall in inflation pushes the MPC closer to a rate cut

  • December’s consumer price figures showed that after a brief pause in November, inflation is back on a downward trend. This is likely to push the Monetary Policy Committee even closer towards a rate cut.
  • The unexpected fall in CPI inflation from 1.5% in November to 1.3% in December left inflation at its lowest level in three years and was rather lower than the consensus forecast (1.5%) and the 1.4% projection made by the Bank of England in November.
  • The fall was largely down to a sharp drop in core inflation (which excludes food, energy, alcohol and tobacco) from 1.7% in November to 1.4%. Admittedly, a third of the fall reflected what seems likely to be a temporary drop in airfares inflation, driven by the timing of the price collection day this year.
  • Even so, inflation is clearly extremely subdued, particularly on the high street. Clothing inflation exerted some downward pressure on CPI inflation, subtracting 0.05ppts from CPI inflation, due to generous discounting. And the unanticipated drop in restaurant and hotel inflation, from 2.4% to 1.6%, knocked a further 0.1ppts off total inflation. Our measure of core services inflation dropped back from 2.7% to 2.5%.
  • Granted, the producer price figures contained some evidence that cost pressures are starting to pick up. Producer output price inflation nudged up from 0.5% to 0.9%. And higher oil prices and utility prices are likely to have an upward influence on inflation in the coming months. This may mean that CPI inflation edges back up to 1.6% in January. But with utility prices set to drop in April and underlying price pressures weak, we still think that inflation could drop back again to a little over 1% later in the year. (See Chart 1.)
  • Overall, the inflation figures might be enough to tip the balance on the MPC towards an imminent rate cut. In a speech today, MPC member Michael Saunders reiterated his view that rates should be cut immediately. And the multitude of comments over the past week has suggested that other MPC members are coming round to this view. Everything now depends on the data over the coming weeks. If the figures fail to improve, rates could be lowered from 0.75% to 0.50% as soon as 30th January. But if the data show signs of a turnaround, most MPC members may be content to sit tight. It will be a very close call.

Chart 1: Contributions to CPI Inflation (ppts)

Sources: Refinitiv, Capital Economics

Table 1: Consumer Prices

CPI

RPI

CPIH

Index

% m/m

% y/y

Core % y/y

Fuel % y/y

Food % y/y

Index

% m/m

% y/y

(% y/y)

Sep.

108.5

0.1

1.7

1.7

-2.1

1.8

291.0

-0.2

2.4

1.7

Oct.

108.3

-0.2

1.5

1.7

-3.3

1.3

290.4

-0.2

2.1

1.5

Nov.

108.5

0.2

1.5

1.7

-2.9

2.1

291.0

0.2

2.2

1.5

Dec.

108.5

0.0

1.3

1.4

1.0

1.8

291.9

0.3

2.2

1.3

Source: Refinitiv


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com