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Inflation fall ‘raises questions about interest rates’

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  • 16/01/2019
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Falls in fuel prices and air fares caused inflation to drop to its lowest level in close to two years in December, easing pressure on UK households.

 

Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) fell to 2.1% last month, down from 2.3% in November, its lowest rate since January 2017 and just shy of the Bank of England’s 2% target.

Tom Stevenson, investment director at Fidelity International, said today’s inflation data raises questions about the trajectory of interest rates.

“With UK CPI a whisker away from the Bank of England’s target, and last night’s vote providing more questions than answers on Brexit, it would seem that the Bank of England’s Monetary Policy Committee has little incentive to hike rates any time soon,” he said.

However, markets are still pricing in a near-50% chance of higher interest rates by August, little changed from last week, which Ben Brettell, senior economist at Hargreaves Lansdown, thinks “looks on the high side”.

He said: “The housing market seems to be cooling, and unsecured personal debt continues to rise. Add in an unhealthy dose of Brexit uncertainty and it’s hard to see why any sane central banker would consider higher rates at present. Across the pond the Fed’s comments are increasingly dovish too, suggesting the expected rate hikes this year might now not materialise.”

 

Consumer uncertainty

While easing inflation will bring some relief to consumers, the picture for the next few months looks uncertain.

Falling crude oil prices caused petrol prices to drop by 6.4p per litre between November and December, reaching the lowest level since April 2018.

Lower fuel and air fares were offset by price rises in accommodation services and, to a lesser extent, mobile phone charges, games, toys and hobbies, and food.

Kate Smith, head of pensions at Aegon, said:With Brexit on the horizon and the uncertainty around what deal the UK will leave the EU with, it is still unclear what the inflationary pressures may bring and whether households will continue to feel an ease in the cost of living or whether this might be swept away.”

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