UK inflation holds steady at 4%, lower than expected

LONDON — U.K. inflation held steady at 4% year-on-year in January on the back of easing prices for furniture and household goods, food and non-alcoholic beverages.

Month-on-month, the headline consumer price index fell to -0.6%, returning to negative territory after December’s surprise increase by 0.4% on the month and 4% annually.

Economists polled by Reuters had produced a consensus forecast of 4.2% year-on-year for January and -0.3% for the month.

“The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages,” the Office for National Statistics said Wednesday.

The closely watched core CPI figure — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 5.1%, below a consensus estimate of 5.2%. On a monthly basis, core CPI slid to -0.9%, below a -0.8% forecast.

“Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months,” U.K. Finance Minister Jeremy Hunt said in a statement.

The CPI goods annual rate slowed from 1.9% to 1.8%, but price pressures in the services industry remained hot, with the CPI services annual rate rising from 6.4% to 6.5%.

UK ‘winning its fight’ against inflation

“The latest inflation print is another reflection of what is happening in the labour market: a tight labour supply is sustaining high wage growth and thus underlying inflationary pressures, especially in services,” said Marion Amiot, senior European economist at S&P Global Ratings.

“That said, recent developments will continue to put inflation on a downward path. Aside from easing energy, food and producer prices, falling vacancies and easing wage pressures are offering positive signs for the Bank of England, that tighter financing conditions are cooling labour demand.”

The U.K. has lagged its peers in bringing down inflation, but the headline CPI has been on a general downward trajectory since the October 2022 peak of 11.1% year-on-year.

The British economy has so far managed to avoid a recession in the face of rapid interest rate hikes from the Bank of England, as it sought to temper inflation. The labor market and wage growth have meanwhile eased but will remain uncomfortably robust for a central bank aiming to drag inflation back to its 2% target.

However, the economy is expected to have entered a slight technical recession in the fourth quarter, with preliminary estimates due out on Thursday morning.

Suren Thiru, economics director at ICAEW, said the softer-than-expected figures of Wednesday were “further evidence that the U.K. is close to winning its fight against soaring inflation.”

“Inflation’s journey back to the Bank of England’s 2% target should now accelerate, with a sizeable fall in energy bills from April and lower food costs likely to drag inflation noticeably lower by the Spring,” Thiru said by email.

“Though core and services inflation remain uncomfortably high, the squeeze from weakening labour demand, slowing wage growth and a struggling economy means they should fall back over this year.”

He nevertheless cautioned that, while the Bank of England is expected to begin cutting interest rates over the summer, any announcements of tax cuts in the government’s Spring Budget statement next month would risk pushing the central bank to keep policy tighter for longer.