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The first fall in inflation in six months is promising, but there’s a long way to go yet

Has UK inflation peaked? The truth is no-one knows, not yet anyway

Has UK inflation peaked? That was the question everyone was tentatively asking on Tuesday.


The truth is no-one knows, not yet anyway.

Official figures at least show that Consumer Price Inflation (CPI) fell by 0.1 per cent in December to 3 per cent.

That is clearly welcome but it doesn’t suggest we’re out of the woods yet. Inflation is still 1 per cent above the Bank of England’s target.

The good news for Bank Governor Mark Carney at least is that he won’t have to write a letter to the Chancellor this month telling the government what he will do to battle inflation. He can point to the interest rate rise in November as proof that the Bank’s monetary policy is working.


Moreover, Retail Price Inflation (RPI) edged up to 4.1 per cent from 3.9 per cent, although given RPI includes mortgage costs and interest rates were raised for the first time in a decade in November, perhaps this shouldn’t come as a surprise.

So, what do we know now that we didn’t know before? Well not much really.

Markets are pencilling an interest rate rise perhaps in August, but this seems unlikely unless the economy picks up steam. There are few, if any, indications the Monetary Policy Committee (MPC) is in a hurry to raise interest rates further.

Consumer lending, which was keeping policymakers awake at night in September and October, has fallen back and the Financial Conduct Authority (FCA) recently pointed out that most of the lending was to people who had plenty of money after all.

If, and it’s a big if at this stage, inflation continues to fall in the coming months the pressure on the MPC to raise interest rates will ease – not that there is much right now anyway – which leaves markets and the economy in a state of limbo, despite the equities markets’ seemingly irrepressible ability to break new records almost daily.

Ultimately, markets will look for guidance in the Bank’s Quarterly Inflation Report in February. By then we should also have a good idea of how much the economy grew by in 2017.

Until then the economy, and households, are in a holding pattern. We need more information before we can get excited about what 2018 has in store.

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