Shock inflation fall raises prospect of interest rate cut

UK inflation has slipped to a three-year-low, raising expectations that interest rates could be cut.

Figures from the Office for National Statistics (ONS) show the Consumer Price Index (CPI) was 1.3% last month, down from 1.5% in November.

Speculation increased across the City about the potential for a rate cut by the Bank of England, after the ONS said early high street sales and discounted hotel rooms pushed inflation to its lowest since November 2016.

The figure was below analyst forecasts of 1.5% and appears to have stirred demand for a rate cut, following recent hints from departing Bank of England governor Mark Carney that a cut could be used to stimulate the economy.

The pound was lower against most major currencies immediately after the inflation figure was announced, down 0.2% against the US dollar at 1.30 and 0.3% down against the euro at 1.17.

City analysts said the surprise fall in inflation means MPC members are likely to vote for a cut at their next meeting on January 30, with market odds now at 60% in favour of a cut.

“Lower inflation puts rate cut back on the menu,” said Yael Selfin, chief economist at KPMG UK.

“For the Bank of England, a cut to the policy rate may seem like a free lunch, with inflation well below target in the latest figures and the mandate safe from jeopardy.

“However, lower rates represent a significant burden to the banking and insurance industries, as well as to pensions.”

“Women’s clothing prices also fell, with more items being discounted.”

The largest downward contribution to falling inflation was the hotel sector, as overnight hotel accommodation prices dived 7.5% between November and December, compared with a rise over the same period in 2018.

Falling clothes prices were the second-largest drag on inflation as retailers heavily discounted women’s fashion ahead of Christmas.

The ONS said 15.2% of items were on sale in December, increasing from 10.9% in the same month a year earlier.

It said that heavy discounting was particularly focused on the high street, with retailers cutting prices on women’s jackets, cardigans, formal trousers and skirts.

The rate of food inflation also slowed down as the price of sugar, jam, chocolate and confectionery slumped 2.1%, although this was partially offset by more expensive vegetables.

Meanwhile, the price of alcoholic drinks fell further, driven by 4.2% lower beer prices and a 3.9% drop in spirits prices.

These factors offset increased inflation for furniture, electrical appliances and mobile phone chargers during the month.

The Retail Price Index (RPI), a separate measure of inflation, was 2.2% last month, flat from the same figure in November.

The Consumer Price Index including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 1.4% in December, down from 1.5% in the previous month.