Inflation holds at 4% – business industry reaction

Latest ONS data has found that inflation held steady at 4% year-on-year in January on the back of easing prices for furniture and household goods, food and non-alcoholic beverages. Month-on-month, the headline consumer price index fell to -0.6%, returning to negative territory after December’s surprise increase by 0.4% on the month and 4% annually. Economists polled by Reuters had produced a consensus forecast of 4.2% year-on-year for January and -0.3% for the month.

ONS Chief Economist Grant Fitzner said “Inflation was unchanged in January reflecting counteracting effects within the basket of goods and services.”

“The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May. Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years.

“All of these factors combined resulted in no change to the headline rate this month.”

Dr. Roger Barker, Director of Policy at the IoD, said “Most market commentators were expecting a blip upwards in inflation in January, driven by an increase in Ofgem’s energy price cap. However, it is reassuring that this upward pressure on prices was compensated for by lower price increases elsewhere. As a result, the narrative of a trend towards lower inflation over the next few months remains intact.

“The components of inflation that are under particular scrutiny from the Bank of England, such as services inflation and core inflation (excluding food and energy prices), remain a concern. Services prices are still rising at 6.1% (a slight increase on the previous month) and core inflation is unchanged. However, January did see a moderate easing in food inflation and in sectors like furniture and household goods.

“The decision as to whether to cut interest rates is now finely balanced. It seems likely that headline inflation will fall significantly in the coming months. But conclusive evidence that the battle against inflation has been won remains elusive. On balance, our view is that the Bank of England should act to buttress business confidence and economic growth by cutting rates sooner rather than later.”

Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said “UK inflation unexpectedly remained at four per cent in January, despite unhelpful base effects from some unusually weak price changes a year earlier. This will be a relief to the Bank of England and the Treasury, both of whom had been warning of a rise.

“The headline rate remains on track to fall to the two per cent target in April, when the Ofgem cap on energy bills will be lowered sharply, and it may well drop further later in the year. Recession and deflation could soon be the bigger threats.

“The headline rate was held down by a further fall in food price inflation and weakness in ‘furniture and household goods’ and ‘clothing and footwear’, suggesting that December’s slump in retail sales has prompted some heavier discounting. This is market forces at work.

“Underlying all this, money and credit growth is subdued, which should continue to dampen inflation in the months ahead.

“Interest rates are probably on hold until May, but when the Bank of England does move it is likely to move quickly, with rates ending the year at around four per cent.”

Alpesh Paleja, CBI Lead Economist, said “No movement in inflation over January is not entirely a surprise, due to base effects and a small rise in Ofgem’s energy price cap coming into effect. We may see a few more bumps in the road over the coming months, but the broad direction of travel with inflation is encouraging, having fallen considerably from its double-digit highs 15 months ago.

“The Bank of England seems to share this view, though will want to see more definitive signs that domestic price pressures are continuing to soften. But with monetary policy now believed to be doing the trick, it’s increasingly a case of “when” rather than “if” interest rates will be cut”.

Suren Thiru, Economics Director at ICAEW said  “This unexpected rise in inflation is a timely reminder that the struggle against soaring inflation is not yet over, particularly given stubbornly high core and services inflation. While inflation may rise again in January, following the increase in Ofgem’s energy price cap, it should fall at a decent pace thereafter, aided by the expected drop in energy bills from April and lower food inflation.

“Although ongoing tensions in the Red Sea may make core inflation harder to shift, the rate should drop back this year as demand is supressed by slower wage growth and a struggling economy.

“Though interest rates will remain on hold next month, with the outlook for inflation for this year improving and the economy struggling to avoid recession, the case for cutting rates sooner rather than later is likely to grow.”