Downside December surprise in UK inflation

December UK CPI came in at 2.5% after a figure of 2.6% the previous month. This was a tenth lower than consensus expectations. Core inflation was two tenths lower than expected at 3.2% (3.5% in November).

Perhaps most importantly – services inflation was four tenths lower than expected at, 4.4% (5.0%). RPI was lower than expected too at 3.5% (3.6%). (All inflation figures are measured year-on-year).

This all provides a bit of welcome relief after several releases consistent with more persistent inflation pressures (e.g. last month’s pay figures) and signs that some companies would pass on the costs associated with the national insurance contribution rise.

It was also reassuring that the downward pressures on inflation weren’t concentrated in only one or two categories. The biggest downward contributors were restaurants/hotels (mostly from hotels), alcohol/tobacco (mostly tobacco related owing to differences in the timing of rises in duty), clothing/footwear, recreation/culture and food/non-alcoholic beverages.

Looking at services inflation, the picture was mixed. Housing-services inflation was unchanged, with communications and the miscellaneous categories experiencing higher inflation. The fall was concentrated in transport services, but across a number of categories (admittedly a lot was from the volatile air-fares component), and the recreation category (again, across a number of sub-categories).

I’ve been assuming a Bank of England rate cut in February and this data at least is consistent with that.

I’ve been assuming a Bank of England rate cut in February and this data at least is consistent with that. Let’s see what forthcoming GDP data and labour market data bring. Headline CPI is likely to rise significantly in coming months, much of which looks set to reflect higher energy prices. But beneath the surface core and services inflation may provide more assurance that inflation is on the right track in the medium-term (which would be in line with my central case). Much will depend on how companies respond to higher costs and what happens to pay growth. For more, see: UK stuck going gradually, for now | Intermediaries | RLAM

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