The Office for National Statistics on Tuesday said that consumer price inflation was 3 per cent in January, the same level as in December and down from 3.1 per cent in November. December’s fall marked the first in the rate since June.
Core inflation – which strips out volatile fuel and food costs – was 2.5 per cent last month, unchanged from the previous month.
Inflation leaped in the aftermath of the UK’s June 2016 vote to leave the EU. The prospect of Brexit sent the pound falling sharply against a host of other global currencies, which translated into higher import costs forcing a rise in the price of goods.
That weighed on broader economic growth across the UK and throttled consumers’ spending appetites, dealing a blow to many retailers.
But since then, the pound has staged a cautious recovery leading many forecasters and economists to predict that the inflation peak has passed.
“Inflation is still 10 times higher than it was two years ago at 0.3 per cent but the hope is that it’s now peaked, reducing pressures on household incomes,” said Kate Smith, head of pensions at Aegon.
She said that the latest figures would be “welcomed by all, but particularly those on fixed incomes like pensioners”.
“Although [inflation] remains elevated, it is gradually creeping toward the edge of the plateau, and households and businesses can start to look forward to lower prices over the coming year,” said Tej Parikh, senior economist at the Institute of Directors.
The ONS said that the largest downward contribution to the change in January’s inflation rate came from prices for motor fuels, which rose by less than they did a year ago. The main upward effect came from prices for a range of recreational and cultural goods and services – particularly admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago.
The Bank of England’s Monetary Policy Committee (MPC) raised interest rates in November from 0.25 per cent to 0.5 per cent, the first increase in a decade, in order to stop inflation getting out of hand over the coming years and to bring it back down to the Bank’s official 2 per cent target.
Earlier this month the Bank held rates steady at that level but hinted that another move higher could be on the cards as early as May.
Over the coming year, Suren Thiru, head of economics at the British Chambers of Commerce, said that the path of inflation is likely to be determined by “the extent to which more subdued UK economic growth is offset by inflationary pressure from rising global commodity prices”.
“Against this backdrop, it remains probable that while inflation will to continue to drift downwards, it’s likely to remain above the Bank of England’s 2 per cent inflation target for some time to come,” he said.
He added that he would “urge the MPC to proceed with caution on raising rates, to avoid dampening business activity and wider economic growth”.
“More must also be done to kick-start business investment, including addressing the upfront cost of doing business in the UK,” he said.