Consumer price inflation edged up to 0.7% in January

Consumer price inflation unexpectedly edged up to a four-month high of 0.7% in January from 0.6% in December and a three-month low of 0.3% in November, according to the latest figures released by the Office for National Statistics (ONS).

Consumer price inflation edged up to 0.7% in January

January’s level was the equal highest level (with October) since last July.

Nevertheless, inflation is still relatively low and supportive to consumers’ purchasing power amid rising unemployment and the prospect of limited pay increases.

Upward pressure on inflation in January came from furniture and household goods, restaurants and hotels, food and non-alcoholic beverages and transport prices.

Downward pressure came from clothing prices, which have not followed normal seasonal patterns since early-2020 due to the impact of COVID-19. Inflation also continues to be limited by the temporary VAT cut for the hospitality and leisure sectors while there was also a dampening impact in December from food prices.

Core inflation was stable at 1.4% in January after rising to this level in December from 1.1% in November.

There was evidence of a pick-up in price pressures further down the supply chain in January although they were still limited. Producer input prices increased 1.3% year-on-year (y/y) in January after an increase of just 0.6% in December as they rose 0.7% month-on-month (m/m). Meanwhile, the y/y drop in producer output prices narrowed to 0.2% in January from 0.5% in December as they rose 0.4% m/m.

Economic forecaster the EY ITEM Club expects consumer price inflation to hover around 0.7% during early-2021 before starting to trend up from Q2. Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the immediate term.

Inflation is expected to rise further once the temporary VAT cut for the hospitality and leisure sectors ends in March. Unfavourable base effects resulting from the fall in oil prices in early 2020 will also have an upward impact, magnified by the recent rise in oil prices to a one-year high.

Energy prices for millions of consumers will rise in April once the price cap rises. After a challenging Q1, an expected progressive firming of the economic recovery from early-2021 will also have some upward impact on inflation.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The EY ITEM Club expects consumer price inflation to rise just above 2% by the end of 2021. However, the EY ITEM Club does not expect inflation to rise much above that level as there will still be excess capacity in the economy and in labour markets.

“With inflation still substantially below its 2% target, the door is very much open for the Bank of England to take further stimulus action to support the UK economy if necessary.

“However, the EY ITEM Club believes that the case for further Bank of England support for the economy will wane from the second quarter as the recovery develops alongside the COVID-19 vaccine roll-out. Consequently, the EY ITEM Club takes the view that the Bank of England is most likely to hold off from acting through 2021, keeping interest rates at 0.10% and the targeted stock of asset purchases at £895bn.”

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