Inflation stays at three per cent despite expectations of a dip

Caitlin Morrison
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A picture taken 17 April 2007 in London...
Inflation stayed at three per cent last month (Source: Getty)

Consumer price index (CPI) inflation remained at three per cent in January, unchanged from the month before, according to the Office for National Statistics (ONS).

The CPI measures the rate at which the prices of goods and services bought by households rise or fall. CPI including owner occupiers’ housing costs was 2.7 per cent, also unchanged month-on-month.

The ONS said the largest downward contribution to the rate came from prices for motor fuels, which rose by less than they did a year ago.

What the ONS said

"Headline inflation was unchanged with petrol prices rising by less than this time last year. However, the cost of entry to attractions such as zoos and gardens fell more slowly. After rising strongly since the middle of 2016, food price inflation now appears to be slowing," said ONS senior statistician James Tucker said.

"Factory goods price inflation continued to slow, with food prices falling in January. The growth in the cost of raw materials also slowed, with the prices of some imported materials falling.

"House price growth increased slightly, driven by rises in Scotland and the South West. By contrast, annual house price growth in London was the lowest of any region in the UK for the third consecutive month."

Missed expectations

Economists were expecting inflation to dip to 2.9 per cent in January. Last week, the Bank of England said it could hike rates sooner than previously expected in a bid to ease inflationary pressure.

In November the Bank forecast two hikes by the end of 2020, but last week it said even three interest rate rises over the next three years would leave “a small margin of excess demand” by early 2020, and said it would aim to reduce inflation over a “more conventional horizon” than before.

"After last week’s hawkish sentiment from the Bank of England at its Super Thursday meeting, which saw the bank’s inflationary outlook for the next two years unchanged, many savers and investors will be wondering about the future direction of UK price rises. Could three per cent mark the peak for inflation?," said Maike Currie, investment director for personal investing at Fidelity International.

"The main driver behind rising prices has been the fall in the pound after the Brexit vote, however, the nature of currency-driven inflation is that it tends to be short-lived and self-correcting. The comparable figures only look bad for a year and the one-off sterling-related adjustment has fallen out of the comparison.

The pound has been steadily rising since the start of the year, passing $1.42 for the first time since Britain’s decision to leave the EU. As the pound continues to strengthen, currency-induced price rises will fall out of the equation.

"The other key factor to keep an eye on is wage growth. With our pay packets lagging price rises, we’re feeling progressively poorer as each month rolls by and this inevitably means we’ll spend less. Less spending keeps a lid on spending and in turn keeps prices low. Of course if wage growth picks up this could change."

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