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Lower utility and fuel prices drag inflation to a two-year low

Joanna Faith
Written By:
Joanna Faith

Inflation fell to a two-year low last month, as falling utility bills and fuel prices eased pressure on UK households.

Inflation, as measured by the Consumer Prices Index (CPI), fell to 1.8% in January, down from 2.1% in December, according to the Office for National Statistics (ONS).

This means that CPI is now below the Bank of England’s 2% target.

With the latest figures showing the strongest wage growth since 2008, rises in pay are now outpacing inflation.

However, this reprieve may not last long, experts warn.

The energy price cap introduced by Ofgem in January drove gas and electricity prices down, the ONS said.

But an increase to the cap announced last week has already resulted in three major energy suppliers hiking prices from April.

Brexit will also have an impact on the inflation picture in the future.

Mike Jakeman, senior economist at PwC, said: “Were the pound to weaken significantly again, inflation would quickly rise above the Bank of England’s target band as it did after the referendum in 2016.

“Alternatively, if companies were given the certainty they crave over the UK’s future trading relationships, a surge in business investment could act as a mild demand shock that would push up prices.”

Interest rates

Last week, the Monetary Policy Committee (MPC) voted unanimously to keep the base rate unchanged at 0.75%, and today’s inflation data will provide policymakers with more reasons to sit on their hands, experts say.

Kate Smith, head of pensions at Aegon, said: “In order to maintain inflation at its 2% target, the Bank of England’s MPC have kept interest rates unchanged at 0.75% referencing Brexit uncertainty and the wider global slowdown.

“Those expecting an interest rate rise to boost savings, including pensioners, may therefore need to wait until the economic and political landscape has become clearer.”