U.K. headline inflation slows in December, likely to remain around 3 pct in months ahead

The annual pace of U.K. headline inflation saw its first drop since last June. The consumer price inflation slowed to 3 percent in December from November’s 3.1 percent. The outturn came in line with consensus expectations. But compared to forecasts, underlying price pressures were more modest, with the ‘core’ rate falling to 2.5 percent in December from 2.7 percent. Stronger energy prices provided the offset, to leave the CPI in line with expectations.

However, with energy components usually having a higher weighting in the RPI basket, this gave a firmer RPI outturn. This impact, along with a stronger-than-expected feed through from November’s rate hike to mortgage interest payments, pushed the annual pace of RPI inflation to 4.1 percent, as compared with expectations of an unchanged 3.9 percent.

Inflation is believed to have peaked now, noted Lloyds Bank in a research report. But the headline inflation is likely to stay around the 3 percent threshold in the months ahead. Nearly all the earlier rise in U.K. inflation could be linked to the drop in the pound and as this impact begins to fade, this should add some further downward impetus to inflation, stated Lloyds Bank. But domestic price pressures stemming from rising wages and tightening capacity constraints are likely to build.

“Overall, we expect these forces to result in inflation only gradually falling back towards 2 percent over the next three years, with the risk that the overshoot proves larger and more protracted”, added Lloyds Bank.

At 16:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bullish 59.8369, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -174.882. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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