U.K. consumer price inflation decelerates unexpectedly in December, BoE likely to cut rate in January

The U.K. headline inflation eased unexpectedly in the month of December. On a year-on-year basis, the consumer price inflation slowed to 1.3 percent from November’s 1.5 percent, increasing market expectations of a cut in the Bank Rate by BoE during the January MPC meeting. Recent comments from a few of MPC members focusing on the likelihood of a near-term rate cut, have lent support to the views already expressed by fellow members who had voted for an immediate reduction at the November and December policy meetings, noted Lloyds Bank in a research report. Given the December inflation data, market expectations have risen with around a 60 percent likelihood for a January rate cut.

Delving into the December data, the slowdown of the headline print was mainly driven by a sharp easing in ‘core’ price inflation, which decelerated to 1.4 percent year-on-year from 1.7 percent seen in November. The downward influences to December inflation were comparatively widespread, with softer clothing and footwear, restaurant and hotels, and transport prices weighting on the annual rate of CPI inflation.

“Even if a January rate cut is not forthcoming, if these softer inflation trends persist, that will undoubtedly keep expectations elevated of a policy response from the Bank of England”, stated Lloyds Bank.

Nevertheless, it is expected that some of this softness is temporary and might unwind in the months ahead. Weaker transport prices in December were concentrated in the airfares sub-category where prices rose 15.8 percent sequentially as compared with the rise of 39.6 percent seen in December 2018. However, according to the ONS, this might have been because of the timing of the price collection days, which, if true, might unwind in the January inflation figures.

“Together, with the feed-through from oil price rises in late 2019/early 2020 should see headline inflation regain some of its vigor in the coming months. Nevertheless, for now with financial market attention centered on the next Bank of England meeting at the end of the month, upcoming data releases are likely to attract more attention than usual”, added Lloyds Bank.

Meanwhile, both CPIH and RPI also came in below expectations, although they dropped by less than CPI. CPIF slowed marginally to 1.4 percent in December from 1.5 percent, as compared with expectations of 1.6 percent. Meanwhile, the annual rate of RPI inflation came in at 2.2 percent, as compared with expectations of a rise to 2.3 percent.