UK inflation holds at 4.0% in relief for BoE and Sunak
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[February 14, 2024] By
Suban Abdulla
LONDON (Reuters) - British inflation unexpectedly held steady at 4.0% in
January, defying forecasts of a rise, official data showed, offering
relief for the Bank of England (BoE) and Prime Minister Rishi Sunak too
ahead of a national election expected this year.
Economists polled by Reuters had expected an increase in the annual rate
to 4.2%.
Consumer price inflation - which surged as high as a 11.1% in October
2022 - is expected to fall further in the coming months, paving the way
for the BoE to start cutting borrowing costs from their 16-year high.
Sterling weakened against the dollar and the euro after the inflation
data was published.
Investors added to their bets on the BoE cutting interest rates this
year, putting a roughly 72% chance of a first reduction coming in June,
compared with only a 40% chance on Tuesday after a surprise jump in U.S.
inflation.
"Overall, the latest inflation data should reassure the Monetary Policy
Committee that the time to start cutting interest rates is approaching,"
Martin Beck, chief economic advisor to the EY ITEM Club, said.
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BoE Governor Andrew Bailey is due to speak to British lawmakers at 1500
GMT on Wednesday.
Britain's core inflation, which excludes volatile food, energy, alcohol
and tobacco prices, was also unchanged at 5.1%, the Office for National
Statistics said.
Services inflation - an indicator of domestic price pressures - rose to
6.5% from 6.4% in December but was not as strong as the BoE had
expected.
The British central bank fears rapid wage growth - which makes up much
of the inflation rate in the services sector - could add more
inflationary pressure across the economy.
Data published on Tuesday showed regular wages rose by an annual 6.2% in
the last three months of 2023, the slowest increase in more than a year
but about double the pace the BoE views as consistent with getting
inflation back sustainably to 2%.
"Inflation never falls in a perfect straight line, but the plan is
working," finance minister Jeremy Hunt said. "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."
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Road construction workers carry out work outside the Bank of England
in the City of London financial district in London, Britain,
February 13, 2024. REUTERS/Isabel Infantes/File Photo
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LIVING STANDARDS HIT
MPC member Jonathan Haskel, one of two policymakers who voted to
raise interest rates at the BoE's most recent meeting, last week
told Reuters he would need to see more evidence of inflation
pressures weakening before changing his stance.
Samuel Tombs, an economist with Pantheon Macroeconomics, estimated
on Wednesday that a gauge of core services prices that the BoE is
watching closely rose by a modest 1.2% month-on-month. Tombs had
initially said the measure fell, which could have been evidence of
inflation pressures weakening, but corrected his estimate.
In further welcome news for consumers, food inflation fell for the
first time in monthly terms since September 2021, dropping by 0.4%
from December.
High inflation has impacted British households' living standards
over the last couple of years, contributing to the electoral
challenge facing Sunak whose Conservative Party is lagging far
behind the opposition Labour Party in opinion polls.
Separate ONS data added to signs of weaker inflation pressures ahead
as prices paid by manufacturers fell by an annual 3.3%, the biggest
fall since May 2020. The prices they charged also dropped, down by
0.6%, the biggest fall since November 2020.
The weakening inflation outlook is likely to help Britain's economy
grow moderately in 2024, although official data on Thursday is
likely to show that it slipped into a shallow recession in the
second half of 2023, according to the analysts polled by Reuters.
(Reporting by Suban Abdulla; editing by William Schomberg, Alex
Richardson, Elaine Hardcastle)
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