Economist  

UK inflation rate drops back to 3%

UK inflation rate drops back to 3%

UK inflation nudged downwards in December to 3 per cent, compared with 3.1 per cent in November.

The Office for National Statistics (ONS) reported while air fares rose last month, it had a smaller impact than at the same point in 2016.

It added that a drop in the price of toys and games also contributed to December's fall.

But the market is being complacent about the future direction of inflation, according to Thomas Wells, manager of the Smith & Williamson Global Inflation-linked bond fund.

Mr Wells' view is that the prime reason for the fall in inflation has been the recent surge in the value of sterling.

On 15 January, sterling rose to the highest level it has been against the dollar since the European Union referendum result was declared on 23 June 2016.

The pound has moved upwards as the market believes a softer Brexit is now more likely than a no deal outcome.

Mr Wells said: "While the overall profile for UK inflation looks better for 2018 than it did for 2017 there are some material tail risks, which could result in sterling weakness which would very easily re-ignite inflation concerns.

"For example, the market is not pricing in a general election this year despite the weakness of the May government, and there is no guarantee that the recent more positive tone of the Brexit negotiations will continue."

Mike Bell, global market strategist at JP Morgan Asset Management, said the increase in sterling will act to push inflation downwards, but the 18 per cent rise in the oil price over the past year will push inflation upwards.

Ben Brettell, senior economist at Hargreaves Lansdown, said the fall in inflation will be a relief to the Bank of England, and added he expects the long-term direction for inflation in the UK to be downwards.

Mr Brettell said: "In January last year consumer price inflation stood at just 1.8 per cent, but rose to what now looks like a peak of 3.1 per cent in November.

"It now seems likely we'll see the rate steadily fall back towards the 2 per cent target over the next year or so, though the ONS reckons it is too early to say the peak has been reached.

"Strip out the Brexit noise and the UK's underlying economic situation doesn't look materially different from the rest of the developed world.

"Big themes like an ageing demographic and the rise of disruptive technologies are exerting downward pressure on prices. I see no reason why UK inflation won't gradually return to the very low levels which persist among our developed-world peers."

david.thorpe@ft.com