UK inflation: Mixed – Bank of England to pause?

The December inflation data was a mixed bag, but a perhaps a bit more reassuring overall looking beyond the headline and at some of the upward drivers. Headline inflation was a tenth stronger than expected, but core and services inflation were a touch weaker than expected.

From a Bank of England (BoE) perspective, I can’t see this release changing much. December Consumer Price Index (CPI) and services inflation were both a tenth lower than expected compared to their published forecasts in the November monetary policy report. So the figures may have been modestly reassuring in that sense. However, services inflation didn’t change much and headline inflation remains well above target and with strong food price inflation (which will probably leave some still uneasy about inflation persistence risks).  

Headline inflation remains well above target and with strong food price inflation. There remains a good chance that the Monetary Policy Committee pauses rate cutting in February.

At this stage, there remains a good chance that the Monetary Policy Committee (MPC) pauses in February rather than continue cutting rates and wait until a bit later in the year for further downward movement in inflation before cutting further. There are significant downward pressures set to hit UK inflation in April as increases in regulated prices (e.g. water bills) are set to be lower this year.

December CPI rose 3.4% year-on-year after 3.2% year-on-year (consensus: 3.3% year-on-year). Core CPI stayed at 3.2% (consensus: 3.3%) and services inflation rose to 4.5% yearn-year from 4.4% year-on-year (consensus: 4.6%). The Retail Price Index (RPI) was a touch stronger than expected at 4.2% year-on-year after 3.8% year-on-year (consensus: 4.1%).

The main upward drivers on the month for headline inflation were tobacco (the rise in tobacco duty came almost a month later than last year) and transport (calendar affects seem to have helped mean a larger increase in air fares than usual). There were also sizeable upward contributions from food/non-alcoholic beverages (which continues to run at relatively strong year-on-year inflation rates) and from restaurants/hotels and clothing/footwear (clothing and footwear can be a volatile component too, affected by changes in the timing and duration of sales - last month, clothing and footwear was one of the biggest drags on inflation). 

The rise in services inflation was led by airfares, but the rest of the picture was mixed. Inflation fell for housing services, communication and in the miscellaneous category but rose across the recreation category.

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