The Office for National Statistics said on Wednesday that consumer prices increased by 4% from a year ago, at the same rate as December. Economists in the private sector and the BOE had predicted inflation to rise slightly to 4.1%. Britain's core inflation, which excludes volatile food, energy, alcohol and tobacco prices, was also unchanged at 5.1%.
January's price increases in the UK were less than anticipated, and declining patterns in food and home goods prices supported the belief that inflation would soon reach the Bank of England's objective.
Governor Andrew Bailey of the BOE is proceeding cautiously with the easing process despite the assumption that inflation will drop below the bank's 2% objective in the upcoming months due to persistent labor market tightness and indications of economic resilience. Higher-than-expected pay statistics released on Tuesday somewhat countered the inflation numbers.
Data published on Tuesday showed regular wages rose by an annual 6.2% in the last three months of 2023, the slowest increase in over a year but about double the pace the BoE views as consistent with getting inflation back sustainably to 2%.
After the publication, the pound swung to a loss as speculators expected larger and faster interest-rate cuts. The amount of easing the BOE will likely give in 2024 is priced in the money market at a higher level than on Tuesday, just before traders quickly unwound their bets in response to higher-than-expected US inflation data.
The Bank of England will be relieved that headline inflation remained stable in January after yesterday's labor market statistics revealed higher-than-expected wage increases. In February, the trend should continue lower, with a decline to less than 2% expected in the spring. Rate cuts for May are still possible but still have a chance of being postponed until June.
As of Tuesday's closing, markets expected the BOE to deliver 61 basis points of cuts this year. Today, it is expecting slightly over 70 basis points. August is anticipated to see the first quarter-point drop.
When Bailey answers questions from members of the House of Lords later on Wednesday, he could provide more hints about the bank's strategic direction. Following its most recent meeting earlier this month, the central bank stated that its forecasts were worried that medium to long-term underlying pricing pressures would resurface.
"Inflation never falls in a perfect straight line, but the plan is working," Chancellor of the Exchequer Jeremy Hunt said after the data was released.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.