U.K. headline inflation unchanged at 3 pct in January, likely to fall gradually in months ahead

U.K.’s annual pace of consumer price inflation was sticky in January. Headline inflation came in at 3 percent, against market projections of a tick lower to 2.9 percent. The latest outturn was also consistent with the Bank of England’s estimate, implicit in its latest projections from the February Inflation Report, noted Lloyds Bank in a research report.

Furthermore, relative to the projections, underlying price pressures were seen building more rapidly, with the ‘core’ rate rising to 2.7 percent in January from 2.5 percent earlier. A smaller rise in domestic energy prices in 2018, comparative to last January, provided the offset to keep the headline inflation on hold in January. With energy components having a higher weighting in the RPI basket, this delivered a weaker RPI outturn to pull the annual RPI inflation rate down to 4 percent from 4.1 percent, consistent with expectations.

According to Lloyds Bank, inflation is believed to have peaked. But in the months ahead, the consumer price inflation reading is expected to fall back gradually towards the BoE’s target rate of 2 percent. The view continues to be that as the effect of sterling’s post-EU referendum decline starts to fade, inflation should decelerate. But at the same time, domestic price pressures stemming from increasing wages and tightening capacity constraints are likely to build.

“Overall, we expect these forces to combine to temper the rate at which inflation falls back towards 2 percent over the next three years, with the risk that the overshoot proves more protracted”, added Lloyds Bank.

At 16:00 GMT the FxWirePro's Hourly Strength Index of British Pound was bearish at -99.1156, while the FxWirePro's Hourly Strength Index of US Dollar was bearish at -94.776. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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