Inflation in the U.K. has surprised positively in January. The Consumer Price Index (CPI) has settled at 4% year-on-year for the first month of the year, remaining unchanged compared to the rate recorded for December. The reading was more positive than expected, as analysts had expected 4.2%, according to data released by the Office for National Statistics (ONS).
Therefore, starting in 2024, the U.K.’s inflation rate is substantially higher than that of the world’s largest economies, with the eurozone at 2.8% and the U.S. at 3.1%.
“The largest upward contribution to the monthly change in annual CPI rates came from housing and household services (mainly higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages,” the U.K. statistics office indicated.
Month-over-month, the CPI decreased by 0.6% in January, mirroring the rate from January 2023. This marks a return to negative monthly changes, contrasting with December’s expectations of -0.3% and an actual increase of 0.4%.
Speaking now of the underlying CPI, which does not consider assets that tend to be volatile, such as food, alcohol, and energy, it remained unchanged at 5.1% y-o-y in January, compared to the 5.2% estimated. From a monthly perspective, the core CPI decreased by 0.9%, below the estimated -0.8%.
On the other hand, the annual rate of the goods CPI decelerated from 1.9% to 1.8%, while the yearly rate of the services CPI increased from 6.4% to 6.5%.
Cost of living rises in the U.K.
The notable rise in the U.K.’s cost of living was driven by a 6.9% increase in the price of food and non-alcoholic beverages, down from December’s 8%, and a 12.4% increase in tobacco and alcohol prices, which is a 0.5 percentage point decrease from the previous month. Thus, discounting the impact of energy and fresh food, the core inflation rate remained at 5.1%.
The Bank of England’s next decision is on March 21. There will be another reading of the consumer price index a day before that decision for Threadneedle Street to digest.
The pound weakened after U.K. inflation data came in below expectations. The pound was trading at $1.2542 at the close of London exchanges on Wednesday, down from $1.2596 at Tuesday’s close.
The UK government’s upcoming challenges
All investors always eagerly await the release of inflation data, so the upcoming release will get all the attention it needs. Not to be overlooked is that the achievement of the inflation target continues to pose challenges, such as the risks linked to the new CPI weights and the slowdown in wage inflation.
The stability of the inflation rate is a relief to the pressure on the Bank of England to raise interest rates; the rising cost of living continues to pose significant challenges to monetary policy. Both supermarkets and retailers are highlighting the potential for price increases.
The upcoming inflation data will be crucial for the Monetary Policy Committee’s decisions on interest rates and possible cuts in prime rates. Governor Andrew Bailey is facing increased pressure to guide the Bank of England toward achieving the 2% inflation target, and the upcoming data will be critical in shaping the monetary policy strategy to be implemented.
