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Our views 15 January 2020

UK inflation - some fuel for the doves

By Melanie Baker, Senior Economist

5 min read

Consumer Price Index and Retail Price Index (CPI and RPI) inflation undershot expectations in December, with CPI falling to 1.3% year-on-year (lowest since 2016) after 1.5% (consensus: unchanged at 1.5%), further below the Bank of England’s (BoE’s) 2.0% target, and RPI remaining at 2.2%Y, rather than rising a tenth as expected.

Hotel accommodation and clothing appear to have been the main drags on inflation, with the Office for National Statistics (ONS) noting that a larger proportion of clothing items were on sale this year than the same time last year.  There was an upward impact from petrol/diesel but this was offset within the transport component by a downward impact from air fares (the ONS note that the timing of price collection days in relation to Christmas may have been a factor for that component).

In terms of the bigger picture, there is some evidence here of weaker domestically driven inflation. Core CPI inflation declined to 1.4%Y after 1.7% with those downward impacts from hotels, clothing and air fares all being captured. The latter two elements can be volatile though, so may well bounce in the January data. The bigger picture indicators I track send mixed messages on underlying domestic inflationary pressure. The least import intensive bits of inflation contributed about the same to overall inflation as they did last month but my measure of core services inflation fell a bit further.   

For the consumer, of course, all else equal, lower consumer price inflation helps keep real pay growth elevated and is supportive for consumer spending volumes.  

The gap between CPI and RPI warrants a mention again – the gap widened a tenth to 0.9pp. The gap had been narrowing since May but has been widening out again over the past couple of months leaving no clear trend (see bottom chart).  Housing depreciation looks to have been the main culprit this time around. 

All in all, there is some fuel here for the doves on the Monetary Policy Committee, despite headline CPI inflation being exactly in line with the BoE’s forecast for average Q4 CPI inflation (at the time of the November Monetary Policy Report, at 1.4%Y). But business confidence (and labour market) measures are likely to be much more important for the next few decisions, especially with some of the more volatile elements of inflation appearing to drive some of the down-move this month.

Graph showing UK Headline CPI from 2006 to 2020 as referenced in the text on page.

Source: Refinitive Datastream as at 15/12/2019

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations. Information correct as at 15 January 2020, unless otherwise stated.