Headline UK CPI inflation has met expectations by dropping sharply from 3.4% in December to 3% in January, but this has not impressed some investors.
“The big drop in headline UK inflation in January is a welcome development, but under the hood the data wasn’t quite as convincing as hoped,” said Adam Hoyes, senior asset allocation analyst at asset manager Rathbones.
“Inflation is almost certain to fall back close to the 2% target in the months ahead, but we have some lingering concerns about the persistence of price pressures in certain parts of the CPI basket,” he added.
Some of that inflation was down to the energy component, added Hoyes, with lower prices at the pump and lower gas bills. Food inflation fell too, with smaller price rises for bread, cereals, and meat.
Some easing in services inflation “always looked likely”, noted Hoyes.
“A spike in notoriously volatile flight prices in December was set to unwind, the impact of VAT being levied on school fees was due to wash out of the year-on-year comparison, and it was clear from newly agreed tenancies that rental inflation would continue on its downward path over the first half of the year,” added Hoyes.
However, Hoyes said he has lingering concerns over the pace of disinflation in the rest of the services basket.
“For example, inflation rates for restaurants and hotels, recreational activities, and car insurance all reaccelerated in January,” he said. “That was enough to drive our preferred measure of underlying services inflation – which ignores rents, volatile prices, and prices that are regulated or indexed to past inflation – higher, from 4.1% in December to 4.3% in January.”
And he added: “It is still almost certain that headline CPI inflation will decline steeply to around the 2% target by April. And the slowdown in pay growth confirmed yesterday should mean price pressures for labour-intensive services begin to ease soon too.”
He therefore thinks the Bank of England is likely to deliver the two interest rate cuts priced into markets for this year.
“But unless underlying services inflation slows further, we won’t be fully convinced that headline inflation will remain at target sustainably,” Hoyes concluded.
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