U.K. headline inflation slows down to below BoE’s target of 2 pct in January

The U.K. headline inflation came in below Bank of England’s 2 percent target in January. The consumer price index fell to 1.8 percent year-on-year from December’s 2.1 percent. The outturn came in below market expectations of 1.9 percent, and primarily reflected the effect of lower fuel and energy prices.

Lower electricity prices and gas prices mainly drove the headline inflation down. Electricity and gas prices fell 6.1 percent sequentially as energy companies cut the price of their standard variable tariffs in response to Ofgem’s energy price cap. The implementation of this cap accounted for 0.2 percentage points of the move lower in the annual rate of CPI. However, it is worth noting that the level of the cap will rise in April, noted Lloyds Bank in a research report. On its own, this should have an upward influence on inflation in that month.

Motor fuel prices also dragged the inflation down by falling for the third straight month. It dropped 1.7 percent in January. It subtracted a further of 0.1 percentage points from the headline rate. Together, the housing and household services sector accounted for nearly all of the change in headline inflation last month.

However, underlying price pressures continued to be sticky. The core inflation came in the same as last month at 1.9 percent year-on-year, while services price inflation rose to 2.5 percent year-on-year last month.

From here, the headline inflation is likely to remain below 2 percent for the rest of the first quarter of 2019, said Lloyds Bank. Nevertheless, beyond that a rise in the energy price cap from April, along with the continued building of domestic price pressures, should put sufficient upward pressure to push the headline rate of inflation back above 2 percent.

“As such, in the scenario that current uncertainty about the UK’s withdrawal from the EU is resolved soon, the longer-term outlook for inflation is consistent with our view that modest increases in Bank Rate are likely to be required over the forecast horizon”, said Lloyds Bank.

Falls were seen in the other measures of inflation with CPIH moving down to 1.8 percent year-on-year and RPI falling to 2.5 percent year-on-year. The smaller fall in the latter showed a couple of measurement impacts.

At 13:00 GMT the FxWirePro's Hourly Strength Index of British Pound was bearish at -88.1349, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 104.447 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex