Inflation to remain below BOE target after January slide

● But outcome for rest of 2019 clouded by whether there is a hard or soft Brexit

Inflation has fallen below the Bank of England’s target for the first time in two years and could remain under 2 per cent for the whole of 2019, though Brexit presents a stumbling block.

Official figures yesterday showed the consumer prices index (CPI) measure of inflation fell to an annualised rate of 1.8 per cent last month, the largest drop since 2016, from 2.1 per cent in December. Lower electricity, gas and petrol prices helped keep a lid on the cost of living.

The main driver was the new price cap on standard variable tariffs recently introduced by energy industry watchdog Ofgem.

Howard Archer, chief economic advisor to the EY Item Club think-tank, said the fresh fall in inflation would see the Bank of England maintain a “wait and see” approach on interest rates until the UK’S planned exit from the Euroand pean Union at the end of next month.

He said: “On the assumption that the UK ultimately leaves the EU at the end of March with a deal, inflation could very well remain below 2 per cent through 2019 and could get as low as 1.6 per cent.

“Muted oil prices are expected to dampen inflation while Ofgem’s price cap on domestic energy prices, which came into effect from January, will further help matters.

“However, if there is a nodeal UK exit from the EU, the inflation outlook will be clouded by a number of factors – most notably what happens to sterling, how well the economy holds up and what tariffs come into effect.”

Guy Foster, head of research at wealth manager Brewin Dolphin, said: “A soft January does not a deflationary summer make. It was a weak month for CPI, but January sales and last year’s oil price are masking the inflationary demon. Services inflation is still running well ahead of target and core inflation is only just below target.”

Yael Selfin, chief economist at KPMG UK, said the inflation data gave central bank policymakers “ample room” to wait before they raise interest rates again as Britain’s leaves the EU.

He said: “In the current climate of heightened uncertainty in regards to the Brexit process, businesses will benefit from a supportive monetary policy.

“Waning UK business investment, and potential shortterm financing difficulties for many SMES [small and medium-sized enterprises] in the event of a no-deal Brexit, will require the Bank of England to keep rates low this year, and the latest inflation figures provide the MPC [the bank’s monetary policy committee] with a mandate to do that.”

The retail prices index (RPI), a separate measure of inflation, came in at 2.5 per cent last month, down from 2.7 per cent in December. Consumer price inflation factoring in owneroccupiers’ housing costs, or CPIH – the Office for National Statistics’ preferred measure of inflation – was 1.8 per cent in January, down from 2 per cent in December.