Food, fuel and even Christmas price cuts contribute to UK meeting inflation target says Zangana

14th January 2014

Falling food price inflation and Christmas price cuts by some retailers have contributed to the UK hitting its inflation target says Schroders European economist Azad Zangana.

Zangana says: “UK annual CPI inflation fell from 2.1% to 2% in December – returning to the Bank of England’s central target for the first time since November 2009. While we had forecast the fall, it came as a surprise for most  investors as the consensus was for no change. The downside surprise was largely caused by the greater than expected fall in core inflation (excluding food and energy), which fell from 1.8% to 1.7%. However, much lower food price inflation (0.3% month on month in December 2013 compared to 1.2% in 2012) was the single biggest negative contributor to the change in the annual inflation rate”. He says there have been a number of other factors that have contributed.

– Some retailers have struggled over the festive period, and have cut prices more aggressively than usual.

– The recent appreciation in sterling has helped lower the price of imported goods and services.

– Fuel price inflation has been lower thanks to stable global oil prices.

“The latest set of data is the first to include the price rises in household energy bills, and as the increases were greater than those in 2012, the sector made an upward contribution.  However, if the energy companies are true to their word, there we could see a slight reversal in the Spring, as the government have eased rules on the energy suppliers to raise green energy related charges.

“Looking ahead, we expect the CPI inflation rate to fall further to 1.9% over the coming months, but then to start rising at the end of Spring on the back of rising economic activity, but also as lower food and energy prices in 2013 come out of the annual comparison.

“With regards to the Bank of England, having inflation back at 2% along with the weaker than expected production and manufacturing data helps reduce the pressure to consider a rise in interest rates – which markets are expecting by the end of the year.”

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