Inflation to fall close to Bank of England’s target

Inflation is expected to have fallen in December to within a whisker of the Bank of England’s target, due to lower motor fuel and tobacco prices.

Consensus estimates predict Office for National Statistics (ONS) figures will reveal on Wednesday that the Consumer Prices Index (CPI) of inflation declined to a 23-month low of 2.1% in December.

Inflation came in at 2.3% in November.

This is near the central bank’s 2% goal and inflation is expected to remain “comfortably below” the target throughout this year, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Prices in January could fall further due to a new cap on energy prices and hover around 1.8% for the rest of the year.

“December’s two-tenths drop in CPI inflation to 2.1% likely will precede a bigger drop, to 1.8% in January, when the introduction of a cap on energy prices alone will subtract 0.2 percentage points from the headline rate.

“Throughout 2019, CPI inflation looks set to oscillate around 1.8%, as a further fall in core goods inflation offsets a modest firming-up of services inflation,” Mr Tombs said.

However, he noted that Bank policymakers will be “more focused on the medium-term outlook for inflation and labour market developments, than on current inflation”.

As a result, he expects the Bank’s Monetary Policy Committee (MPC) to increase the Bank rate by 0.5% to 1.25% this year.

Last month, the MPC voted unanimously to keep rates unchanged at 0.75%.

Headline December inflation is expected to be dragged lower by a decline in tobacco inflation following recent tax hikes and a fall in motor fuel inflation after the Government’s petrol and diesel price data showed a 4.9% month-on-month drop in December.

Recent updates from retailers have suggested that dwindling consumer confidence forced both high street and online businesses to discount heavily in the run-up to the festive period.

However, Mr Tombs said there is “no concrete evidence to back up anecdotal reports that retailers discounted more than usual before Christmas”.

He cited data from the British Retail Consortium that revealed that non-food shop prices fell by just 0.4% in December, the smallest fall since 2013, and the Confederation of British Industry, saying that the number of retailers reporting that stock levels were adequate to meet demand was not abnormally high last month.

“As a result, core goods inflation likely held steady at 0.9% in December, before resuming its descent in early 2019,” Mr Tombs added.

Meanwhile, both food inflation and services inflation are expected to remain steady at 0.5% and 2.5%, respectively, in December.

However, Mr Tombs said a sharp shift in either direction cannot be ruled out for services inflation “given the unpredictability of the airline fares component in the last month of the year”.