The Consumer Price Index (CPI) rose by 0.3% in the year to January, compared with 0.2% in December. This is the highest annual rate registered for 12 months.
The largest upward contribution to the change in the CPI 12-month rate came from motor fuels and lubricants with prices falling at a slower rate of 2.6% in January, compared with a 6.8% drop in the previous year. A larger fall in petrol prices in January this year than the same month last year was the main determinant of this differential.
There were also upward contributions from food and non-alcoholic beverages, alcoholic beverages and tobacco, and clothing and footwear.
The only substantial downward contribution to the change in the CPI 12-month rate came from air fares. There is typically a drop in prices in January following an increase in December and the fall this year of 35.8% is greater than the fall in 2015 of 17.1%.
The latest data suggest that inflationary pressures in the UK remain largely absent. The aforementioned upward contributors to CPI helped ‘goods’ deflation ease from 2.1% in December to 1.5% in January. However, service sector inflation declined to 2.3% from 2.9% and ‘core inflation’, which strips out food and fuel, edged down from 1.4% to 1.2%.
CPI is forecast to remain only marginally above zero for the next couple of months. We expect the oil price to make a modest upward contribution as the large price drops seen over the past 18 months fall out of the comparison, though elsewhere the upward contribution will be benign. The price for Brent crude oil has picked up slightly in February from the low of $28 a barrel in January as Saudi Arabia and Russia opened talks to agree an oil output cap. An agreement to cap output at January levels was finalised today and will offer some further support to oil prices.
Given the benign inflation outlook we expect that the first rise in Bank Rate will not take place until 2017Q1. In the meantime the low inflationary environment is expected to support strong consumer spending growth of 2.6% this year.