Cheaper petrol and food prices are expected to push inflation further down in December, necessitating that BoE Governor Mark Carney write to the UK chancellor explaining why inflation is so low and what the central bank proposes to do to ensure inflation comes back to the target.
The annual rate of CPI inflation in the UK is expected to have slowed down to as low as 0.7% in December, from a twelve-year low of 1% measured a month before. The main downward price pressure in November was cheaper food and fuel, which economists expect to persist well into 2015.
The Office for National Statistics (ONS) is releasing December data on Tuesday morning at 9:30 am GMT. Tuesday's CPI release will be the last before the Bank of England's (BoE) quarterly Inflation Report forecasts on February 11.
The latest fuel cost reports showed that UK petrol prices hit new lows in December and January. The AA Fuel Price Report showed that a price battle among suppliers led to the third biggest monthly fall in December in the last 25 years. According to UK government statistics, petrol prices decreased 8.4% over the year to December while diesel dropped 10.1%.
The combination of cheap input costs and a prolonged price war among major UK retailers suggest consumer price inflation should remain significantly subdued in the months to come.
British Retail Consortium (BRC) director general Helen Dickinson said last week that "… the Producers Price Index is deflationary so retail business have seen significant decreases in their own input costs. However, fierce competition … has seen these savings passed on directly to consumers. It's a win-win scenario that many are predicting will continue long into 2015."
The BRC reported last week that shop price inflation continued to tumble in December. Annual food price inflation ticked up a bit to 0.1% after deflation of 0.2% in November, while non-food deflation slowed slightly to 2.8% in December from 2.9% a month before.
According to the latest official figures, input prices remained in deflationary territory in November and are expected to have dipped further below to -2.6% between November and December as crude oil prices remain the major downward driver, falling 25.1% in the year to November - the largest annual decline since September 2009.
CPI inflation more than one percentage point below the official 2% will trigger an open letter from BoE Governor Mark Carney to UK Chancellor George Osborne explaining the reasons why inflation has fallen to such an extent and what the BoE proposes to do to ensure inflation comes back to the target.
The BoE's December MPC minutes said that "inflation in the coming months would be pushed further below the target by the contribution from energy prices and lagged effects of sterling’s appreciation, and was set to remain below the target, even after these effects had passed through, for a significant period."
The views on the current outlook for inflation remained split within the BoE's nine-strong Monetary Policy Committee (MPC). Two members, Martin Weale and Ian McCafferty, continued to argue in December that the central bank should see beyond temporary downward pressure from cheaper oil and other imports. Both argued that a sharply tightening labor market is expected to soon increase domestic price pressures sharply.
Weale and McCafferty said that "since monetary policy could be expected to operate only with a lag, it was desirable to anticipate labor market pressures by raising Bank Rate in advance of them." A similar view has also been forming among some members within the dovish majority of the MPC.
Partly due to significantly low inflation, the BoE kept monetary policy unchanged in January. Economists expect the first round of policy tightening as early as August this year or as late as February 2016.
Disclaimer: The information provided by WBP Online come from its Reporters and Foreign Correspondents and its third party suppliers ("Information Providers"). WBP Online believes its text services to be reliable, but accuracy is not warranted or guaranteed. This includes facts, views, opinions and recommendations of individuals and organizations deemed of interest.
Neither WBP Online nor Information Providers guarantees the accuracy, completeness or timeliness of, or otherwise endorses, these views, opinions or recommendations, gives investment advice, or advocates the purchase or sale of any security or investment.