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Fall in energy prices drags UK inflation to two-year low

Fall in energy prices drags UK inflation to two-year low

The biggest monthly fall for gas prices since the 1980s helped drag down UK inflation to the lowest level in two years in January as the government’s energy price cap came into effect. Offering respite to hard-pressed British households, the consumer price index (CPI) dipped to 1.8% in January from 2.1% in December, fuelled by…


The biggest monthly fall for gas prices since the 1980s helped drag down UK inflation to the lowest level in two years in January as the government’s energy price cap came into effect.

Offering respite to hard-pressed British households, the consumer price index (CPI) dipped to 1.8% in January from 2.1% in December, fuelled by the sharp fall in energy prices at the start of the year, theOffice for National Statistics(ONS) said.

Inflation

The biggest ever monthly fall in gas prices since comparable records began in 1988 coincided with the start of energy regulatorOfgem’s cap on household bills. As well as the sharp decline in energy prices, Whitehall statisticians said the drop in inflation was also fuelled by lower petrol prices and a decline in the cost of hotel rooms.

The latest fall in inflation marks the end of the cost of living outstripping the Bank of England’s 2% target for CPI, which is set by the government. The fall in the value of the pound after theBrexitvote had pushed inflation higher, squeezing household disposable income as it pushed up the cost of imported goods.

Inflationpeaked at a five-year high of 3.1% in November 2017, above the level of pay growth for British workers, although it has gradually fallen.

While the current capped rate for energy prices is effective until the end of March, it was announced earlier this month that it would rise by 10%, drawing criticism of the price cap for the government.

Around 15m households will see their energy bills increaseby more than £100 a year from April after Ofgem said it was lifting two price caps because of rising wholesale costs.

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Howard Archer, the chief economic adviser to the EY Item Club, said he expects inflation to stay modestly below 2% for much, if not all, of 2019: “We see inflation averaging 1.8% over 2019 and it could very well get as low as 1.6% during the year.”

However, he added: “If there is a no-deal UK exit from the EU at the end of March, 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.

“Our suspicion is that inflation will spike significantly higher if the UK leaves the EU without a deal.”

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