UK inflation hit its lowest level for two years in December, but a disorderly Brexit could lead to inflation rising by one per cent, according to Thomas Wells, who manages the Smith and Williamson Global Inflation Linked Bond fund.
Data released by the Office for National Statistics (ONS) this morning, revealed UK inflation was 2.1 per cent in December, down from 2.3 per cent in November.
Howard Archer, chief economic adviser to the EY Item Club, said there is little evidence of inflation in the system, with the costs of production falling, due to lower commodity prices, and to prices not rising at factory gates.
Mr Wells said: “UK inflation continued to moderate in December, as was widely expected. Psychologically, dropping below 3 per cent is quite important because markets and consumers have become accustomed to it running at higher levels.
“While today’s print is welcome from a short-term price stability point of view, the market had already discounted this benign outcome and, in fact, inflation expectations have been dominated by the increased possibility of a no-deal Brexit, which has re-emerged as one of the probable scenarios. The exact impact of a disorderly Brexit is very hard to judge as we would be in uncharted territory, but most of the research we have seen suggests that it could add at least a full percentage point to the headline figure.”
A Brexit outcome that is less predictable would cause the value of sterling to fall in value, which would make the cost of imported items rise, and push inflation higher.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics said the drop in inflation is the result of lower petrol prices, and noted that rent and transport costs continue to rise. He said the recent rise in UK wages is now being reflected in the inflation data, and the Bank of England are likely to be focused on this trend rather than shorter-term factors.