Fall in energy prices drags United Kingdom inflation to two-year low

Tom Adams, head of research at advice site Savings Champion, said: 'Having come tantalisingly close in December, CPI inflation has finally fallen below the Bank of England's two per cent target and is now at its lowest level for two years.

Inflation (blue line) plunged to 1.8 per cent in January the lowest rate for two years, official statistics revealed today.

Mike Hardie, head of inflation at the ONS, said: 'The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time past year. Economists had on an average expected inflation at 2.48 per cent in January, according to a poll of 30 economists surveyed by news agency Reuters before the last RBI policy meeting.

The food price inflation rate in November had declined to 2.65%.

Meanwhile, heavy discounting from retailers saw clothing and footwear prices falling by 1.3% for the year to January, which had a small downward pull on inflation. "We expect core inflation, therefore, to continue to continue to hover only slightly below the 2% target during 2019, before rising in 2020 as the tight labour market generates more cost pressures for firms", Tombs adds.

"The implication is that second round effects are much more muted, and shocks to food and fuel prices do not propagate as strongly into core inflation", JPMorgan economists Sajjid Chinoy and Toshi Jain wrote in a recent note.

Inflation was dragged down by lower electricity, gas and petrol prices between December and January, which was partially offset by lower air fares.

Economists said it facilitated the Bank's "wait and see" approach on interest rate hikes ahead of Britain's departure from the EU. The Reserve Bank of India, which reduced the key lending rate by 0.25 per cent last week, mainly factors in CPI-based inflation while arriving at its bi-monthly monetary policy.

"With inflation fairly well behaved, the Bank will also have the ability to support the economy by cutting interest rates if there were a no deal Brexit", says Capital Economics's Wishart. The fall in the value of the pound after the Brexit vote had pushed inflation higher, squeezing household disposable income as it pushed up the cost of imported goods.

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