UK inflation has accelerated at its slowest pace in the last 3 years

Inflation in the UK has unexpectedly risen at its slowest pace in the last three years in December, paving the way for potential reductions in interest rates by the Bank of England this month.

Consumer price inflation accelerated by 1.3% YoY in December, taking into account the slowest rate of increase since November 2016, the National Statistical Office announced on Wednesday. Core inflation reported a surprising drop to 1.4% from the 1.7% recorded in November.

The indications are fueling speculation about the forthcoming cut in interest rates by the central bank. Financial markets forecast a more than 40% chance of a quarter-point reduction in interest rates after the Monetary Policy Committee meeting on January 31st.

Inflation remains below the 2% target and economists expect it to continue to decline at least until the middle of next year, partly because of the appreciation of the pound last year.

This is good news for consumers’ purchasing power, with wages now increasing by more than 3% annually.

But political turmoil over Brexit led to a sharp economic downturn at the end of last year, and several central bank officials said they would be declining interest rates if polls after Boris Johnson’s election failed to show a significant boom in economic activity.

In his first major speech for 2020, Governor of the Central Bank of England, Mark Carney, stated that the Monetary Policy Committee had sufficient space to act, if necessary, and Silvana Tenreyro said she could support the reduction of interest rates if economic weakness continued.

Michael Saunders, who, along with Jonathan Haskel, voted to cut interest rates in November and December, signalled that he would continue his push this month. In his speech, he predicted that growth would remain subdued and called for “relatively swift and aggressive” action.

Last month, hotel prices fell by 7.5%, with 11% of hotels surveyed providing more than 25% discounts, the statistics office said.

Price reductions were highest in women’s clothing. The value of articles in this sector decreased by 15% on an annual basis.