U.K. annual inflation slowed in January as expected by economists to the lowest since November 2010, as the impact of the value added tax hike dropped out of the annual comparison, data from the Office for National Statistics showed Tuesday.
Consumer price annual inflation slowed for the fourth month in a row to 3.6 percent in January from 4.2 percent a month ago. Nevertheless, the inflation figure remains well above the 2 percent target.
Data showed that cost of financial services, clothing and footwear, and air transport exerted large upward pressure on annual inflation. Month-on-month, consumer prices declined 0.5 percent, offsetting last month's 0.4 percent rise.
Core inflation that excludes cost of food, energy, alcoholic beverages and tobacco, slowed to 2.6 percent annually, in line with forecast, from 3 percent in December.
Retail price annual inflation came in at 3.9 percent in January, down from 4.8 percent in December. The rate was also smaller than the expected 4.1 percent. Excluding mortgage interest payments, retail price inflation eased to 4 percent from 5 percent a month ago.
As inflation stays more than one percentage point above 2 percent for three straight months since BoE Governor Mervyn King wrote his last open letter, King sent another letter to Chancellor George Osborne as required by remit explaining why inflation exceeded the target.
King said inflation would continue to fall back to around the target by the end of 2012. In coming months, the further moderation is likely to reflect the declining contributions from petrol prices and any remaining VAT impact, together with recently announced cuts to domestic energy prices.
Still, the pace and extent of the fall in inflation remain highly uncertain. Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go, he observed. The balance of risks around the inflation target in the medium term lay to the downside.
In his reply, Osborne welcomed the determination of the central bank to set policy to ensure inflation is on track to meet the target in the medium term.
The BoE last week decided to pump additional GBP 50 billion into the economy to support growth. The central bank indicated that slowing inflation and muted wage growth provided scope for more quantitative easing. The bank retained its record low 0.50 percent interest rate.
The Inflation Report to be published on February 15 will provide more understanding about inflation and output projections and its future course of action on quantitative easing.
Howard Archer, chief UK Economist at IHS Global Insight said it is highly possible that consumer price inflation will be down to 2 percent by the end of 2012 helped by the ongoing waning impact of sharply rising oil, commodity and food prices in late/2010/early-2011.
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.