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Inflation remains flat at 2.7% but below City forecasts

ANNUAL UK inflation came in at 2.7% for a fourth consecutive month in January – the longest period in which it has been flat since comparable records began in 1996.

This annual consumer prices index (CPI) inflation rate, unveiled yesterday by the Office for National Statistics, was slightly below the 2.8% figure forecast by the City but above the 2% target set by the Treasury for the Bank of England.

The largest upward effects on the annual CPI inflation rate came from alcohol, with prices in this category recovering strongly after festive discounting, and from air fares, which fell by less than they normally do in January after a smaller-than-usual increase in December. The price of vegetables, fruit, and bread and cereals also exerted an upward influence on the annual CPI inflation rate.

The greatest downward pressures came from clothing and footwear, with prices falling by more this January than last, and miscellaneous goods and services, including fees for financial services such as money transfers, baby wipes and toothbrushes.

Consultancy Capital Economics forecasts annual CPI inflation will peak at more than 3% in the middle of the year, with pay falling in real terms for most of 2013. The Governor of the Bank of England has to write an explanatory letter to Chancellor George Osborne when inflation moves more than one percentage point above or below the 2% target.

Referring to Mark Carney, the head of the Bank of Canada who will succeed Sir Mervyn King as Bank of England Governor on July 1, Capital chief UK economist Vicky Redwood said: "One of Mr Carney's first jobs could be writing an explanatory letter to the Chancellor."

Ms Redwood predicted the Bank of England's latest quarterly inflation report, due today, would "paint a nasty picture of weak growth and above-target inflation for much of the next two years".

However, Capital expects annual CPI inflation to fall back faster than the Bank's Monetary Policy Committee does.

Ms Redwood highlighted Capital's belief that annual CPI inflation could be back to target by the year-end. She added: "If the economy continues to struggle, above-target inflation should not be a barrier to further monetary policy stimulus."

Annual inflation on the old all-items retail prices index measure rose from 3.1% in December to 3.3% in January.

Contextual targeting label: 
Finance

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