UK Inflation
UK inflation unexpectedly maintained stable at 4.0% in January, defying projections of an increase, official statistics indicated, relieving the BoE and Prime Minister Rishi Sunak ahead of a national election this year.
The yearly rate was expected to rise to 4.2% by Reuters economists.
Consumer price inflation, which was greater in Britain than in other rich economies until recently, is anticipated to decline further in the coming months, allowing the BoE to cut borrowing costs from their 16-year high.
After inflation statistics was released, sterling fell versus the dollar and euro.
After a surprising surge in U.S. inflation, investors bet more on the BoE decreasing interest rates this year, offering a 72% chance of a first decrease in June compared to 40% on Tuesday.
“Overall, the latest inflation data should reassure the Monetary Policy Committee that interest rate cuts are imminent,” said EY ITEM Club chief economic advisor Martin Beck.
The ONS said that Britain’s core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, remained at 5.1%.
Services inflation jumped to 6.5% from 6.4% in December, but the BoE expected more.
Rapid wage growth, which drives services sector inflation, worries the British central bank about inflationary pressure across the economy.
Regular wages grew 6.2% in the last three months of 2023, the slowest gain in more than a year but roughly above the BoE’s target of 2% inflation, according to data released on Tuesday.
Finance minister Jeremy Hunt remarked, “Inflation never falls in a perfect straight line, but the plan is working.” “We have made huge progress in bringing inflation down from 11% and the Bank of England forecast that it will fall to around 2% in a matter of months.”
Living Standards Hit
Last week, MPC member Jonathan Haskel, one of two policymakers who voted to hike interest rates at the BoE’s most recent meeting, told Reuters he would need further evidence of inflation pressures lessening before changing his mind.
Pantheon Macroeconomics economist Samuel Tombs predicted that a BoE-monitored core services pricing gauge declined 0.2% month-on-month.
Food inflation declined 0.4% from December, the first monthly drop since September 2021, which was good news for consumers.
Inflation has hurt British households’ living standards in recent years, making it difficult for Sunak’s Conservative Party to catch up to the Labour Party in polls.
The ONS said that producer prices declined 3.3% annually, the greatest drop since May 2020, indicating reduced inflation pressures. They also cut prices 0.6%, the greatest decline since November 2020.
Reuters experts expect Britain’s economy to grow marginally in 2024 due to lowering inflation, but official statistics on Thursday may reveal that it entered a short recession in the second half of 2023.
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