Inflation Remains At 2.7%

Consumer prices decreased by 0.5% over January. Nonetheless, CPI inflation remained at 2.7% for the fourth consecutive month. Inflation should remain around these levels for a while, and thus exceed the central bank’s 2% target for price stability, complicating the BoE’s task to loosen its policy further.

Consumer prices decreased by 0.5% over January. This fall coincided with sales of the beginning of the year. The largest downward pressure came from clothing and footwear (-5.4% m/m). By contrast, prices recorded their largest increase in alcoholic beverages & tobacco (+4.3% m/m), as prices recovered after the pre- Christmas discounting.

Nonetheless, CPI inflation remained at 2.7% for the fourth consecutive month. It thus stood below the upper bracket of the BoE’s inflation target for the ninth month in a row. According to the ONS, the largest upward pressure came from housing and household services (0.57 pp) as energy bills particularly rose. Prices for food non-alcoholic beverages, in restaurants & hotels and education - in line with the rise in university tuition fees - contributed to the increase in inflation. Conversely, core inflation decreased from 2.4% in December to 2.3%.

In the first nine months of 2012, inflation fell rapidly from last year's peak. On average, inflation was 2.8% in 2012 (after 4.5% in 2011). But it has remained high fora few months in line with the rise in university tuition fees, power bills and food prices. These upwards pressures may progressively ease in the coming months. Moreover a rise in productivity, in line with a slight improvement in activity growth may ease pressure on prices, providing that wage increases remain under control. Overall, inflation will nonetheless exceed the central bank’s 2% target - though decreasing somewhat.

BY Catherine STEPHAN

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