UK inflation expected to hold steady at four-year low

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Deep pre-Christmas discounting and a slowdown in food price rises will probably have offset energy bill hikes and left inflation relatively benign last month, economists said.

Official data due on Tuesday morning is expected to show inflation held at November's four-year low of 2.1%, according to the consensus in a Reuters poll of economists. The highest estimate of the consumer price index measure (CPI) is for 2.3% and the lowest for 1.8%, which would mark the first reading below the Bank of England's 2% target since November 2009.

The wider retail price index (RPI) measure, which includes housing costs and is typically used to set pay deals, is expected to tick up to 2.7% from 2.6% in November.

Bills went up for many households in December as well-publicised energy price hikes came into effect. Fuel prices are also expected to have put upward pressure on inflation in December.

But at the same time, there have been reports that food price inflation has eased in recent months and the British Retail Consortium said last week that food price inflation slipped to a three-year low in December.

The group said overall shop prices fell for the eighth month running in December. With deep discounting as shops battled for hard-pressed customers the drop in prices of 0.8% on a year earlier was the deepest deflation since the BRC's data began in December 2006.

Economists are divided as to whether the widespread Christmas special offers came in early enough to be captured in the official inflation data.

There are also some other wildcards to consider, said Alan Clarke, economist at Scotiabank in London.

"Two key influences this month are likely to be petrol prices and utility bill hikes. Those aside, there is the usual risk of volatility in Christmas airfares and reports of deeper than usual seasonal discounting," he said.

"The airfares component of the CPI and RPI tends to be a lottery at the best of times. That intensifies further around Christmas and Easter given price movements of close to 40%. We have aimed towards the low end of the range given the fall in oil over the past six months, but that component is typically the joker in the pack."

If inflation remains low in December it will make life easier for the BoE's monetary policy committee, said Chris Williamson, economist at data specialists Markit.

"Lower inflation will provide a relief to BoE policymakers, providing more leeway to keep interest rates at a record low for as long as possible to generate a sustainable recovery," he said.

For workers the slowdown in price rises also brings some relief after several years of inflation running well ahead of average pay growth. But inflation is still more than double the 0.8% pace of average earnings growth.

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Tuesday 14th January 2014 07.00 Europe/London

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