U.K. Inflation Poised to Hit BOE Target as Fuel Prices Tumble

(Bloomberg) -- U.K. inflation fell to its lowest rate in almost two years in December as the cost of filling up a vehicle plunged.

Consumer prices rose 2.1 percent from a year earlier, the least since January 2017, the Office for National Statistics said on Wednesday. However, core inflation accelerated to 1.9 percent, boosted by the price of hotel accommodation.

U.K. Inflation Poised to Hit BOE Target as Fuel Prices Tumble

What Our Economists Say:

“Inflation is set for a period below target this year. In the near term that’s likely to stem from weaker sterling oil prices, but further out it should reflect the impact of news around Brexit. We continue to think there will be a deal and expect sterling to rally, though the timing of any lift in the currency has become more uncertain.” 

--Dan Hanson, Bloomberg Economics. Read the full REACT

Key Insights

  • Overall inflation rate fell from 2.3 percent in November and appears on course to drop below the Bank of England’s 2 percent target as early as this month. Motor fuel prices have fallen further in January.
  • Slowdown has been faster than expected, with the BOE predicting a December rate of 2.4 percent just two months ago. Inflation averaged 2.3 percent in the fourth quarter, versus BOE forecast of 2.5 percent.
  • Auto-fuel prices plunged 4.4 percent in December, the biggest monthly drop in almost four years. The cost of filling up the tank has fallen almost 6 percent over the past two months, bringing relief to households seeing a return to real wage growth.
  • Downward pressures also came from tobacco prices, due to the timing of annual duty increases, and air fares as pre-Christmas hikes were smaller than a year earlier. Upward pressures came from hotel prices and mobile phone charges.
  • There are few immediate implications for monetary policy. Despite cost pressures building in the labor market, almost no one expected the BOE to raise rates before Britain is due to leave the EU on March 29 and Parliament’s emphatic rejection of Prime Minister Theresa May’s Brexit deal Tuesday has thrown the outlook into further confusion.
  • Brexit fears continue to take a toll on the property market. Annual house-price growth was little changed at 2.8 percent in November. In London, the worst-performing region, prices fell 0.7 percent.

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  • Inflation in the services sector, seen as an indicator of domestically generated pressures, stood at 2.4 percent in December. Goods-price inflation was 1.8 percent.
  • A measure of inflation including housing costs slowed to 2 percent, while retail prices, used to determine payments on index-linked gilts, rose just 2.7 percent, the least since January 2017.
  • Pipeline pressures eased, as producer input prices fell 1 percent from November amid a 9.7 percent drop in the cost of crude oil. The annual rate of increase slowed to 3.7 percent, the least since 2016.
  • Output prices dropped 0.3 percent, the first decline for almost three years, taking the year-on-year rate of increase to 2.5 percent.

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