The Consumer Price Index (CPI) annual inflation rate was unchanged for the fourth month in a row at 2.7% in January.

The continuing stability in the CPI was encouraging given that rising food prices continue to pose a threat to inflation as the impact of extreme weather conditions last year continue to be felt. The largest upward pressures this month came from alcohol – with prices recovering after Christmas sales – and air fares. Miscellaneous goods and services and clothing provided the largest downward pressures.

Within the overall inflation figure there was little change after the abrupt narrowing of the gap last month between service sector inflation and goods inflation. (Goods inflation rose from 1.5% to 2% in the 12 months to December while service sector inflation eased from 4.2% to 3.6%). In January, both measures were broadly unchanged, with goods inflation at 1.9% (despite a 4.5% rise in food prices over the year), while service sector inflation picked up slightly to 3.7%.  

The stability of recent inflation figures is consistent with a backdrop of stagnant output and little labour market pressure. These conditions are likely to persist but risks to inflation over the next few months are skewed to the upside given sterling’s depreciation in recent weeks and further likely upward pressure from food prices. These factors threaten to push CPI inflation towards 3% in the next few months, maintaining the squeeze on real disposable incomes and household spending. 

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Peter Gutmann
Managing Consultant