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UK inflation falls to five-month low of 10.1%

UK inflation slowed by more than expected to a five-month low in January, adding to growing evidence that price pressures have peaked.

The annual rate of consumer price inflation declined to 10.1 per cent in January, the Office for National Statistics said on Wednesday, down from 10.5 per cent in December. Inflation hit a high of 11.1 per cent in October.

The January reading was lower than the 10.3 per cent forecast by economists polled by Reuters.

Core inflation, which strips out volatile food, energy, alcohol and tobacco prices, declined to 5.8 per cent in January from 6.3 per cent the previous month. The figure, a closely watched measure of underlying price pressure, was much lower than the 6.2 per cent forecast by economists.

“With the end of the inflationary menace on the horizon, the Bank of England is under increasing pressure to change its course by ending the current tightening cycle,” said Yael Selfin, chief economist at the consultancy KPMG.

The Bank of England recently forecast that headline inflation would fall “sharply” for the rest of the year on the back of lower energy price growth. It signalled that it could be near the end of its tightening cycle while warning about the risks of “greater persistence” in underlying inflation.

However, services inflation, a measure of domestically generated price pressure, also eased sharply to 6 per cent in January from 6.8 per cent in the previous month.

“It is the easing in services inflation that will do the most to reassure the Bank of England that inflation is moderating as it had hoped,” said Ruth Gregory, economist at Capital Economics. She added that the change of interest rates rising from the current 4 per cent to her forecast of 4.5 per cent “are now a bit slimmer”.

Markets are pricing in a 0.25 percentage point rate rise in interest rates next month, a slowdown from the half percentage point increase in February.

The slowdown will be little relief for households as prices remain elevated and inflation continues to rise faster than wages. Moreover, food prices rose at an annual rate of 17 per cent in January, unchanged from the previous month and the highest on record.

The slowdown in January’s annual inflation was “driven by the price of air and coach travel dropping back after last month’s steep rise”, said Grant Fitzner, ONS chief economist. He added that “petrol prices continue to fall and there was a dip in restaurant, café and takeaway prices”.

The annual price growth of motor fuels slowed to 7.7 per cent in January from a peak of 43.7 per cent last July.

However, UK price pressures remain higher than in some other countries, in part because of energy costs.

US inflation slowed to a 15-month low of 6.4 per cent in January. In the eurozone, preliminary figures showed price growth slowing to an eight-month low of 8.5 per cent in January, following a large reduction in energy inflation.

Chancellor Jeremy Hunt said: “While any fall in inflation is welcome, the fight is far from over.

“High inflation strangles growth and causes pain for families and businesses — that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy.”