3% CPI: Inflation Will Fall Over Next 12 Months

Economists expect the fall in inflation - from 3.1% in November to 3% last month - to be the beginning of a downward trend

Emma Wall 16 January, 2018 | 11:50AM
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Basket of goods has risen 3% over the past year

Inflation hit 3% in the UK for the month of December, according to the latest figures from the Office for National Statistics. This was down slightly from the previous month’s rate of 3.1%.

The pound dropped against its major counterparts in early European deals on the news, which was in line with expectations. The 3.1% logged in November was the fastest since early 2012. The Bank of England’s target rate of inflation is 2%.

Core inflation, which excludes energy, food, alcoholic beverages and tobacco, slowed to 2.5% in December from 2.7% in November.

The ONS said the downward effect came mainly from air fares, along with a fall in the prices of a range of recreational goods, particularly games and toys.

The downward contributions were partially offset by an increase in tobacco prices, reflecting duty increases that came into effect following the Autumn Budget, along with an increase in petrol and diesel prices.

Ian Kernohan, economist at Royal London Asset Management, expects this fall to be the beginning of a trend, with inflation declining to the Bank of England target over the next year.

“Last month saw CPI inflation fall slightly to 3%. Much of the recent rise in inflation was driven by sterling's devaluation during 2016,” he says.

“However, this factor will begin to fade and inflation should fall back towards the 2% target over the coming year, with Producer Prices figures already showing input price inflation falling sharply.”

David Page, senior economist at AXA Investment Managers, agrees that inflation will continue to fall, but expects the decline to be more gradual, closing the year at 2.25%.

“We forecast a gradual deceleration in CPI inflation with rising energy prices likely to deter a faster drop. We forecast, CPI inflation to average 2.9% in the first three months of the year, and we expect inflation to head lower in the second quarter, but remain above 2.5% until June,” he says.

This will mean that the Monetary Policy Committee will remain cautious over the above-target inflation, and Page believes the tightness of the labour market and any acceleration in wage growth will determine changes to interest rates.

Page predicts the Bank will next raise rates in August.

But the fall in CPI is not the only inflation data out today. BlackRock bond fund manager Ben Edwards, says it is worth looking a little deeper at the data. 

“As we expected, recent stability in the pound allowed core inflation to peak last month and the 2.5% December figure will likely give the Bank of England cover to resume its ‘wait and see’ strategy. Brexit negotiations will resume prominence as the driver of UK monetary policy,” he says.

“While easing CPI measures should be seen as good news, for the embattled UK consumer the wait continues. RPI breached 4% for the first time in five years offering little respite as wage growth remains subdued. Whenever the Bank next hikes rates, it seems unlikely to be driven by a resurgent household sector.”

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Emma Wall  is former Senior International Editor for Morningstar

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