"With the energy price cap set to decline in April, this should set the stage for headline inflation to decline more substantially in coming months."
- Lindsay James, investment strategist at Quilter Investors
UK headline CPI inflation came in lower than expected for January at an annual 4.0% - against the consensus forecast for 4.2%.
That means inflation remained level at 4.0% from December, with prices falling by -0.6% in monthly terms.
Core CPI inflation (excluding energy, food, alcohol and tobacco) also held steady month-on-month at 5.1% while CPIH inflation, which includes owner occupiers' housing costs, rose by 4.2% in the 12 months to January, also the same rate as in December 2023.
The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from higher gas and electricity charges, while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.
Lindsay James, investment strategist at Quilter Investors, commented: “Following what had been a period of steadily declining inflation, this morning’s data from the ONS reveals the UK saw another pause in the pattern of headline disinflation, with CPI at 4%, the same rate as in December 2023 and still double the Bank of England’s target.
“Higher gas and electricity prices lead the way as the primary driver of this uptick, with energy prices in January 2024 reported to be 18% lower than at the peak in January 2023, but 89% higher than in January 2021. However, this is in line with prior expectations and with the energy price cap set to decline in April, this should set the stage for headline inflation to decline more substantially in coming months.
“Core inflation, excluding energy, food, alcohol and tobacco, has been falling considerably slower than the headline rate, and progress here also appears to have stalled. It held steady at 5.1% in November and December, and once again refused to budge in January, driven in part by strong services inflation which rose from 6.4% to 6.5%. That said, the month-on-month data is more encouraging, and so this is unlikely to sway the Bank of England from its recent suggestion that interest rates have peaked.
“Yesterday’s UK labour market statistics revealed a further fall in wages, with annual growth in regular earnings (excluding bonuses) decreasing to 6.2% in October to December, down from 6.6% in the prior three-month period. However, while on the face of it this seems high, annualising the pattern over the past three months indicates that this is now falling quite quickly, with the annualised nominal growth rate of regular earnings running at 2.2% - rapidly nearing the Bank of England’s target and providing a little reassurance that this inflationary pulse is weakening.
“What’s more, tomorrow’s GDP data is widely anticipated to reveal the UK fell into a recession at the end of last year. Though Andrew Bailey has pushed back with an expectation that it will be both shallow and short lived, pressure on the Bank to cut rates sooner rather than later will no doubt continue, and today’s CPI data release will do very little to change that.”
Jeremy Batstone-Carr, European strategist ar Raymond James Investment Services, said: “This morning’s January CPI data shows a continuation of the strengthening inflationary pressures seen in December. Despite the sharp fall in consumer price pressures over the first month of the year, inflation has not abated, justifying the Bank of England’s decision to hold UK interest rates steady at its early February meeting.
“There are numerous forces influencing prices for UK customers – Ofgem’s lifting of the energy price cap has added upward pressures, while a hearty fall in food prices and alcohol duty has provided some respite – and just in time for Valentine’s Day.
“But the Bank of England’s vision is not clouded by rose-tinted glasses, with their recent economic forecasts emphasising that any future decisions regarding interest rate cuts will consider the evolution of price pressures. Today's confirmation of increased year-on-year core consumer prices will signal that rate-setters must not yet drop their guard.
“That being said, today’s inflationary pressures are not expected to last. With winter slowly turning into spring, inflationary pressures will gradually improve, the icing on the cake being the sharp drop in the utility regulator’s energy price cap scheduled for April. All this should drive inflation to the 2% target, as anticipated by the Bank. Should the summer bring a partial reacceleration in inflation, as is forecast, aggressive rate cuts may not be on the horizon. Nonetheless, a partial loosening will provide welcome relief for hard-pressed households and businesses in the months to come.”
Daniel Casali, chief investment strategist at Evelyn Partners, added: "This was a benign inflation reading given the expectation for a higher rate, and indicates that the broad downward trend in inflation is continuing. We see disinflationary pressures driving the rate down towards the Bank of England’s forecast of around 3% in Q4 of this year.
"In the data, upside to inflation was driven by a roughly 5% increase in the Ofgem cap on household energy that fed through to gas and electricity prices. On the downside, goods price disinflation continues as retailers offer discounts at the start of the year, as seen in monthly falls from both furniture/household goods and food/non-alcoholic beverages CPI categories.
"The broader trend of inflation deceleration is continuing. Importantly, headline CPI inflation is running slightly below the BoE’s forecasts over the last few quarters. This confirms that we have reached the end of the interest rate hiking cycle, and expect the BoE to cut interest rates in the coming months and provide some support to the gilt market."
