The rise in CPI inflation for the first time in six months in January was in line with the Bank of England’s expectations, so this is unlikely to move the dial on the outlook for interest rates.
Reversing the recent fall
- The rise in CPI inflation for the first time in six months in January was in line with the Bank of England’s expectations, so this is unlikely to move the dial on the outlook for interest rates.
- The jump in CPI inflation from 1.3% to 1.8% left it at its highest level since July 2019. That was rather higher than the consensus forecast of 1.6%, but was in line with our forecast and the MPC’s prediction in its January Monetary Policy Report.
- The rise was partly down to energy effects, as fuel inflation rose from 1.0% to 4.7% and January’s 2019’s fall in electricity and gas prices wasn’t repeated. (See Table 1.) But the core inflation measure (excluding food, alcohol and energy) also picked up from 1.4% to 1.6%, as airfares inflation snapped back from -8.5% to +0.9% and the drop in restaurant and hotel inflation in December was reversed. Clothing inflation picked up too, from -0.9% to +0.4%, providing a welcome sign that the retail sector may have turned a corner at the start of this year. We’ll know more once the retail sales data for January is released tomorrow.
- There was a partial offset from a fall in furniture inflation from 1.5% to 0.2%. That suggests the revival in housing market activity is not yet feeding through to more spending on the high street. But it may be only a matter of time before furniture firms feel more confident in passing on bigger price rises.
- Even so, inflation will probably still fall back in the coming months. The most recent plunge in oil prices and associated drop in fuel prices should subtract 0.1ppts from CPI inflation in February. And the planned reduction in the utility price cap, from £1,179 to £1,162, will knock off a further 0.3ppts in April. In addition, price pressures at the start of the pipeline are still very weak. While input price inflation shot up from 0.9% in December to 2.1% in January, it is likely to fall back again in the coming months in response to the recent drop in oil prices. And output price inflation only ticked up a little, from 0.9% to 1.1%.
- As a result, CPI inflation will probably slip back to 1.5% within the next few months and remain below 2.0% for the rest of the year. (See Chart 1.) But for the MPC, the fact that inflation is evolving in line with its projections provides another reason not to cut interest rates in the coming months.
Chart 1: Contributions to CPI Inflation (ppts)
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org