UK inflation falls to 2-year low, offering households help before Brexit

  • Consumer prices rose at an annual rate of 1.8 percent in January after a 2.1 percent increase in December, the Office for National Statistics said on Wednesday.
  • A Reuters poll of economists had pointed to a rate of 1.9 percent.
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British inflation fell to a two-year low in January, dipping below the Bank of England's target and offering some relief to households ahead of Brexit.

Consumer prices rose at an annual rate of 1.8 percent in January after a 2.1 percent increase in December, the Office for National Statistics said on Wednesday. A Reuters poll of economists had pointed to a rate of 1.9 percent.

British consumers have been pressured by inflation since the Brexit referendum in June 2016 after a slump in sterling of more than 10 percent against the dollar and euro.

Inflation peaked at a five-year high of 3.1 percent in November 2017 when British households faced much greater price increases than the European Union average.

That difference has now almost closed but economists warn that inflation could return in the event of a no-deal Brexit.

Despite the fall in inflation since late 2017, and wages growing at their fastest in a decade, businesses have reported a downturn in consumer spending in recent months.

Surveys show households are worried about the outlook for 2019, with Britain on course for a no-deal Brexit on March 29 unless Prime Minister Theresa May can broker a revised deal with the EU that would be accepted by her divided party.

Last week the Bank of England said inflation was likely to fall below its 2.0 percent target in the coming months, in part reflecting a fall in oil prices.

"The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year," ONS statistician Mike Hardie said.

The ONS figures also suggested less short-term pressure in the pipeline for consumer prices.

Among manufacturers, the cost of raw materials was 2.9 percent higher than in January 2018.

That marked the slowest annual increase since June 2016, the month of the Brexit referendum. Economists polled by Reuters had expected input prices to rise by 3.8 percent.

Manufacturers increased the prices they charged by 2.1 percent last month compared, the smallest annual increase since October 2016 and weaker than the consensus forecast of 2.2 percent.

Separately, the ONS said house prices in December rose by an annual 2.5 percent across the United Kingdom as a whole, the smallest increase since July 2013 and compared with 2.7 percent in November. Prices in London alone fell for a sixth month running, down 0.6 percent on the year.