Sterling stumbles as inflation remains below Bank of England’s target

Consumer price index (CPI) inflation increases to 1.8% in January, its highest level since June 2014
14 February 2017

Russ Mould, investment director at AJ Bell comments:

“January’s headline inflation figure in the UK came in below market forecasts for a 1.9% increase and is still below the Bank of England’s target of 2%. As a result the pound weakened as investors took the view the Bank of England’s Monetary Policy Committee will continue to take an unhurried approach to raising headline interest rates from their current record low of 0.25%.

“One wrinkle that Governor Mark Carney will be pondering is the Office for National Statistics’ move to use the CPIH indicator as its benchmark from March, rather than plain CPI.

“The CPIH reading includes owner occupier housing costs and Council Tax, to give a much fuller picture of household expenditure and on January’s data it already stands at 2.0%, smack on the Bank of England’s official target.

“While this is unlikely to have Governor Carney and the Bank of England Monetary Policy Committee scurrying to raise interest rates straight away, the influence of house prices and housing costs may be a further factor to consider, even if their preferred measure, the ‘core’ CPI figure, remained unchanged in January at 1.6%.

“The ‘core’ CPI figure strips out volatile items like food, energy and housing costs, which may make sense from an economic theory perspective but is less use for hard-pressed consumers who are finding their wallets and purses squeezed by inflation on a daily basis.

“Wednesday’s wage growth number will therefore be particularly informative. This reached 2.8% in the three months to November and it is important from a consumer spending perspective that this continues to outpace the CPIH index. If inflation starts to overtake it, then consumers could feel worse off, to the potential detriment of retailers and restaurateurs who are themselves feeling the heat from higher costs, the weaker pound and increases in their business rates bills from April.”

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