UK inflation slides below 2% for the first time since 2017

A cap on energy prices by Ofgem was the main driving force behind UK inflation falling to a two-year low of 1.8% in January, according to data from the Office of National Statistics (ONS).

The news means that headline inflation has fallen below the Bank of England’s 2% target for the first time in two years.

‘The largest downward contribution to the change in the CPIH 12-month rate came from housing and household services, where gas and electricity prices fell, between December 2018 and January 2019, by 8.5% and 4.9%, respectively,’ the ONS said.

‘The downward movement partially reflected the response from energy providers to Ofgem’s January energy price cap which came into effect from 1 January 2019.’

Lower inflation fuels rise in real wages

Record falling inflation will spur a wise in wages if past data is anything to go by, with the average basic salary in the UK rising by as much as 3.3% per annum in the quarter to November, meaning that with inflation falling to 1.8% in January, real earnings could grow by as much as 1.5% a year.

‘Inflation fell for the third month in a row to 1.8% in January, the lowest level since January 2017, bringing the 12-month rate finally below the Bank of England’s target of 2%,’ Head of Pensions at Aegon Kate Smith told The Guardian. ‘With the latest wage growth figures showing a positive trend, the gap between earnings and inflation continues to widen and households will feel an ease in the cost of living.’

‘In the period of real wage growth, individuals should find themselves in a strong financial position to set out financial goals and those who can afford to save any additional income should be encouraged to do so,’ she added.

Weak inflation a signal of an ailing UK economy

Despite the British people getting slightly more bang for their buck as a result of inflation falling in January, weak inflation can also be interrupted as an early warning sign that the UK economy is beginning to cooldown.

‘Despite the UK labour market remaining tight, political and economic uncertainty have held prices down,’ Close Brothers Asset Management Chief Investment Officer Nancy Curtin said. ‘With oil prices low on the back of weaker global demand and air fares tumbling, inflation has kept close to the Bank of England’s target’.

‘With idiosyncratic issues in both the US and Europe slowing growth, Brexit affecting the UK, trade disputes, and a Chinese slowdown, we’re indisputably in a mid-cycle slowdown,’ she added.

‘A global recession seems a far-flung prospect, however in the UK Carney must be flexible and data-driven, putting decisive monetary policy on the back burner until greater political and economic clarity emerges.’