Danske Research Team
Danske Bank A/S
In line with our expectations, UK CPI inflation declined by 0.2 percentage points to 0.3% in January 2015 from 0.5% in December 2014 (Danske Bank: 0.3%, consensus: 0.4%). This is the lowest reading since the data series began in 1989. Based on an Office of National Statistics (ONS) model, inflation has not been this low since March 1960.
The further fall in inflation is mainly due to declines in fuel and food prices. As indicated by weekly fuel prices, fuel prices alone dragged inflation down by 0.2 percentage points. Food prices pulled it down by 0.1 percentage points. Alcohol & tobacco and recreation & culture pulled inflation down by a combined 0.13 percentage points. Clothing prices pushed in the other direction by 0.13 percentage points.
Core inflation increased slightly to 1.4% y/y in January 2015 from 1.3% y/y in December 2014. Although core inflation remains subdued, it is still significantly above zero, implying that the deflationary tendencies in the British economy are limited. Overall, the low commodity prices are good news for the British economy as they support private consumption.
In the Inflation Report published last week, Bank of England (BoE) lowered its shortterm inflation forecasts significantly, mainly due to the lower oil prices. The BoE now expects inflation to stay low in the short-term but to pick up in the medium-term. Hence the Bank Rate could be raised despite the low inflation if the medium-term outlook calls for a tighter monetary policy. This supports the case for a rate hike this year. We currently expect BoE to hike at its August 2015 meeting. However, the low inflation is a downside risk to this forecast as it gives the BoE the opportunity to be more patient.
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