Press release

15 Jan 2020 London, GB

Consumer price inflation down to 37-month low of 1.3% in December gives Bank of England scope to cut interest rates

Consumer price inflation dipped to 1.3% in December from 1.5% in November, taking it down to its lowest level since November 2016.

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  • Consumer price inflation dipped to 1.3% in December from 1.5% in November, taking it down to its lowest level since November 2016. December’s inflation rate was lower than expected. The consensus forecast had been for a stable rate of 1.5% and is good news for consumer purchasing power.
  • Inflation of 1.3% gives the Bank of England ample scope to cut interest rates if the economy fails to quickly show clear signs of improvement following December’s decisive General Election result. Average consumer price inflation averaged 1.4% over the fourth quarter of 2019, which was exactly in line with the Bank of England’s forecast in the November Monetary Policy Report. Consumer price inflation averaged 1.8% over 2019, down from 2.5% in 2018 and 2.7% in 2017.   
  • A number of Bank of England MPC members have recently indicated that they could vote for an interest rate cut in the near-term – and very possibly as soon as 30 January at their meeting of the year – if survey evidence does not show improvement over the next few weeks. The “flash” January purchasing managers' survey for services and manufacturing activity (out on 24 January) and the January CBI distributive trades and industrial trends surveys could be highly influential in determining whether or not the Bank of England cuts interest rates on 30 January.
  • December’s reduced inflation rate of 1.3% provides a boost to consumer purchasing power and keeps it at a decent level – although it has come off the highs seen around July. Annual earnings growth moderated to 3.2% in the three months to October from an 11-year high of 3.9% in the three months to July. While this was adversely affected by lower bonus payments, regular earnings growth, which excludes bonus payments, moderated to 3.5% from a peak of 3.9%.
  • Inflation was brought down in December by lower prices for hotels and restaurants, clothing and footwear, and food and non-alcoholic beverages. There was also a modest overall downward impact from transport prices (despite an upward impact from fuel prices which fell less than a year earlier). Core inflation dipped to 1.4% in December from 1.7% in November.
  • Modest upward inflationary pressure in December came from furniture and furnishings, major appliances and small electrical goods, and mobile phone charges.
  • Price pressures further down the price chain were modest in December (albeit the year-on-year increases firmed from November) which bodes well for consumer price inflation remaining limited. Producer input prices were down 0.1% year-on-year in December as they edged up 0.1% month-on-month. Meanwhile, the annual increase in producer output prices was contained to 0.9% in December as they were flat month-on-month.
  • Consumer price inflation looks likely to remain close to 1.5% through the early months of 2020. It looks unlikely to get back up to its target rate of 2% during 2020, although it is likely to be on a gradually rising trend in the latter months of next year.
  • Domestic inflation pressures are expected to be limited over the next few months at least, due to spare capacity following recent soft economic activity which is likely to constrain companies’ pricing power. Earnings growth has also recently moderated. An overall pick-up in sterling in recent months should also help limit inflation, although the pound has recently fallen back from its peak levels seen in the aftermath of December’s decisive General Election result amid increased market expectations that the Bank of England could cut interest rates early in 2020, and possibly as early as 30 January. Meanwhile, oil prices are expected to be little changed overall in 2020 compared to 2019.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“Consumer price inflation came in lower-than-expected at 1.3% in December, taking it down to the lowest level since November 2016.

“Inflation was down from 1.5% in November and October, 1.7% in September and August, and an equal 2019-high of 2.1% in August.

“Consumer price inflation averaged 1.8% over 2019, down from 2.5% in 2018 and 2.7% in 2017.

“At 1.3% in December, consumer price inflation was substantially below the Bank of England’s 2.0% target rate.

“Inflation was brought down in December by lower prices for hotels and restaurants, clothing and footwear, and food and non-alcoholic beverages. There was also a modest overall downward impact from transport prices (despite an upward impact from fuel prices which fell less than a year earlier).

“Core inflation dipped to 1.4% in December (the lowest since November 2016) from 1.7% in November, October and September. Core inflation had previously risen back up to 1.7% in September after dipping to 1.5% in August from a six-month high of 1.9% in July (when it had been lifted by price hikes for some of the more erratic components, notably consumer games and consoles). Core inflation had previously been locked in a very narrow 1.7-1.8% range from February through to June. 

“Modest upward inflationary pressure in December came from furniture and furnishings, major appliances and small electrical goods, and mobile phone charges.

Outlook for inflation

“Inflation looks likely to remain close to 1.5% through the early months of 2020. Inflation looks unlikely to get back to 2% until 2021.

“Domestic inflationary pressures are expected to be limited over the next few months at least, due to spare capacity following recent soft economic activity which is likely to constrain companies’ pricing power. Earnings growth has also recently moderated. Annual earnings growth has come down to 3.2% in the three months to October from an 11-year high of 3.9% in the three months to July. While this partly reflected lower bonus payments, it is notable that annual regular earnings growth has come down to 3.5% from 3.9% (earnings growth of 4.0%–4.5% used to be considered consistent with the Bank’s target inflation rate of 2.0%). We suspect that earnings growth is likely to stabilise around or just under 3.5%.

“An overall pick-up in sterling in recent months should also help limit inflation, although it has recently fallen back from its peak levels seen in the aftermath of December’s decisive General Election result amid increased market expectations that the Bank of England could cut interest rates early in 2020, and possibly as early as 30 January. The pound recently traded at its best level since May 2018 against the dollar of $1.3514/£ in December, compared to a 31-month low close to $1.20/£ during August. However, it is currently trading around $1.30. The pound also achieved a three-year high against the euro in December.

“Relatively stable oil prices look likely to help limit inflation. We expect Brent oil to average around $65/barrel over 2020 compared to $64/barrel over 2019. It is currently trading around $64.5/barrel.

“Price pressures further down the price chain were still modest in December, which bodes well for consumer price inflation remaining limited. Producer input prices were down 0.1% year-on-year in December as they edged up 0.1% month-on-month, although this was considerably less than the annual drops of 1.9% in November and 5.0% in October (the largest annual decline since April 2016). Meanwhile, the annual increase in producer output prices was limited to just 0.9% in December as they were flat month-on-month. However, the annual increase was up from 0.6% in November (the lowest since July 2016).

“Consumer price inflation looks unlikely to get back up to 2% during 2020 – although it is likely to be on a gradually rising trend over the latter months of the year – as GDP growth is below trend over the year as a whole despite an anticipated gradual pick-up in activity as the year progresses. Additionally, an expected firmer pound will help to limit the rise in inflationary pressures.”