UK Inflation Holds Steady


UK consumer price inflation remained steady at 2.1 per cent in December, above the Bank of England’s target for the third consecutive month.

The reading was broadly in line with analysts’ expectations, although higher than the Bank’s own forecast in its November Inflation Report that inflation would average 1.9 per cent over the last quarter of 2007.

Analysts said the overshoot was unlikely to dissuade policymakers from cutting interest rates in February, although the monetary policy committee would have seen the data before deciding to leave rates unchanged this month.

However, economists warned that higher energy prices could push the headline rate of inflation higher over the next few months, limiting the scope for further easing in monetary policy to counter a slowdown in activity.

Minutes of January’s MPC meeting, which will be published on Wednesday, will be scrutinised for comments showing the extent of concerns over inflationary pressures.

The biggest upward effects on inflation came from ongoing rises in food prices, and from clothing retailers giving smaller discounts than they had the previous year – although the mid-month reading may not capture more aggressive discounts some retailers timed for the period immediately before and after Christmas.

The biggest downward effect came from gas and electricity prices, helped by comparison with a spike in inflation in December 2006, when utilities were raising tariffs. This favourable base effect will fall out of the comparison from next month onwards, just as energy suppliers prepare to raise prices again.

Inflation on the retail price index measure eased from 4.3 per cent in November to 4 per cent, largely because mortgage interest payments were rising slower than last year when lenders were passing on an interest rate rise to homeowners.


TradingEconomics.com, Financial Times
1/15/2008 6:28:59 AM