UK inflation hits two-year low on falling energy costs

London (AFP)

British annual inflation hit a two-year low point in January, undershooting the Bank of England’s 2.0 percent target on falling oil and other energy costs, official data showed on Wednesday.

The Consumer Prices Index 12-month rate hit 1.8 percent last month, down from 2.1 percent in December, the Office for National Statistics (ONS) said in a statement.

That marked the first time since January 2017 that the rate has fallen underneath the Bank of England’s official 2.0-percent target level. Analysts had forecast a drop to 1.9 percent.

Inflation was pulled lower by a decline in electricity, gas and motor fuel prices between December and January.

“The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year,” said ONS inflation head Mike Hardie.

“The Bank of England may be pleased to see inflation ease below… target in January, as this may give them breathing space in which to calibrate monetary policy in the run-up to and initial stages of Brexit,” said AJ Bell investment director Russ Mould.

The Bank of England’s main task is to use monetary policy, notably interest rates, as a tool to try and keep the UK inflation rate close to 2.0 percent.

– ‘Fog of Brexit’ –

Britain is scheduled to quit the European Union on March 29, but there remains intense uncertainty over whether Prime Minister Theresa May can clinch a viable trade deal with Brussels.

The British central bank recently froze its main interest rate at 0.75 percent and slashed its forecast for UK growth this year to 1.2 percent from 1.7 percent, blaming “the fog of Brexit”.

Gloomy official data Monday showed that the UK economy grew at its slowest pace in six years in 2018 on Brexit uncertainty, as fears grew that Britain could crash out of the EU without a deal.

Gross domestic product growth last year slowed sharply to 1.4 percent, down from 1.8 percent in 2017.

Hargreaves Lansdown economist Ben Brettell argued that a no-deal withdrawal could spark a tumbling pound.

A weaker British currency makes imported goods more expensive, and therefore would push up UK annual inflation.

Ordinarily this would push a central bank to raise rates but Brettell believes the Bank of England would go the other way.

“Of course if we get a cliff-edge, no-deal Brexit, all bets are off — a drop in sterling would likely see a sharp rise in imported inflation, but I would expect the Bank to look through this and cut rates to support the economy,” he said.

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