UK inflation at 12-month high

UK inflation has reached its highest level in a year, equalling the 0.3 percent seen in January 2015. This continues the trend of inflation being at or very close to zero and confirms the complete absence of pressure on the Bank of England to lift interest rates. 

The headline rate continues to be largely driven by volatile fuel prices. The largest contribution to higher inflation was from motor fuels – although prices fell 2.6 percent between December and January, twelve months ago prices fell by 6.8 percent. If the recent oil price rally is sustained, we could see inflation continue to tick upwards in the coming months, though the Bank of England said earlier this month that inflation would likely undershoot the 2 percent target until 2018.

Core inflation, which strips out volatile components like food and energy, is a better measure of the underlying inflationary pressures in the economy. It fell by more than expected to 1.2 percent in January (from 1.4 percent the previous month). The trajectory of wage growth is a key driver for inflation, and figures released tomorrow are expected to show a further deceleration. 

All in all, domestic inflationary pressures remain notable by their absence. Even Ian McCafferty, the most hawkish member of the MPC said yesterday that he withdrew his vote for higher interest rates because he feels inflationary forces have receded in recent months. There looks no reason to suggest the era of ultra-low interest rates will come to an end any time soon.

Created on: 16-Feb-16 15:18
By: Ben Brettell, Senior Economist, Hargreaves Lansdown

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