UK inflation holds steady at 4%

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UK inflation stayed steady at 4 per cent last month, undershooting forecasts and leading traders to increase bets that the Bank of England will cut interest rates on the back of easing price pressures from the summer.

Consumer prices rose at an annual rate of 4 per cent in January, the same rate as in December, the Office for National Statistics said on Wednesday. Month on month, consumer prices declined by 0.6 per cent.

Although inflation was still double the BoE’s target, analysts had expected an uptick to 4.2 per cent, slightly above the central bank’s estimate of 4.1 per cent.

The figures prompted traders in the swaps market — which reflects predictions of the future level of BoE interest rates — to increase bets that the central bank could start cutting its benchmark rate, which stands at 5.25 per cent, from June.

Traders are now pricing a quarter-point cut by that month as a 60 per cent probability, up from 40 per cent before the data was released. Markets moved to price in close to three quarter-point rate cuts by the BoE this year, up from nearer two before the ONS release.

Sterling also nudged lower after the figures, sliding 0.4 per cent to $1.2539. Interest rate sensitive two-year gilt yields dropped 0.1 percentage points to 4.58 per cent while the FTSE 100 rose 0.7 per cent.

The data showed the biggest downward pressures coming from food and household goods. Services inflation, which policymakers view as a better measure of domestic price pressures, was also lower than expected, edging up from 6.4 per cent to 6.5 per cent.

Core inflation — which excludes energy, food, alcohol and tobacco — remained steady at 5.1 per cent.

“The surge in prices of the pandemic and energy crisis will soon be a bad memory,” said Thomas Pugh, economist at audit firm RSM UK, adding that a further near-term drop in inflation could allow the BoE to “pivot” and “throw the doors wide open” to interest-rate cut by early summer.

Grant Fitzner, ONS chief economist, said upward pressures, including the increase in the cap on household energy bills and the first rise in second-hand car prices since May, had been offset by lower prices for furniture and household goods and the first monthly fall in food prices for two years. Staples such as bread were the biggest driver of this drop.

The figures will be a boost for chancellor Jeremy Hunt as he finalises what could be the last Budget statement before the election expected this year. Hunt said they showed “we have made huge progress in bringing inflation down”, but shadow chancellor Rachel Reeves said “millions of families are struggling with the cost of living”.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the data was “further evidence that the UK is close to winning its fight against soaring inflation”. A big drop in energy bills due in April was “likely to drag inflation noticeably lower by the spring”, he added.

The BoE published new forecasts this month showing price growth — which peaked at 11.1 per cent in October 2022 — would return to its 2 per cent target “temporarily” in the second quarter of 2024 but then increase during the rest of the year.

But Huw Pill, BoE chief economist, said last week that inflation would not need to return all the way to 2 per cent for the central bank’s Monetary Policy Committee to start cutting rates from their current 16-year high, since policy would still be restrictive even after a downwards move.

The MPC lifted the cost of borrowing from a record low of 0.1 per cent in November 2021 to 5.25 per cent last summer in a bid to tame the surge in price rises.

The inflation data comes a day after the release of figures showing US price growth eased less than expected in January, hitting hopes that the Federal Reserve might start cutting rates as soon as May.

It also follows the release of UK wage data showing pay growth has not yet slowed as much as analysts had expected — a lingering concern for the BoE, which believes that inflation could remain “sticky” if employers are able to pass on higher labour costs to consumers.