The UK’s inflation rate has fallen this week for the first time since June. The inflation rate dipped to 3% in December, down from November’s rate of 3.1% – a six-year high, as had been expected by the market.
“The fall-back in CPI inflation from 3.1% in November to 3% in December marks the beginning of what we expect will be a sustained downward trend over the course of this year,” says Paul Hollingsworth, Senior UK Economist with Capital Economics in London.
The rate drop therefore saw Sterling’s solid run extended as when data matches market expectations it tends to have a neutral effect on Sterling. Accordingly the Sterling-to-Dollar exchange rate trade is near 18-month highs at 1.3767 and the Sterling-to-Euro exchange rate holds daily gains at 1.1255.
The impact of air fares as well as a decline in the price of toys and games is the cause of the rate drop. The Office for National Statistics (ONS) has said that although air fares actually went up in December, it had a lesser impact than at the same point in 2016. The ONS also stated that it was too early to say if this was the start of a longer-term decrease in the rate of inflation.
The inflation rate had been rising progressively over the past year, partially due to the decrease in value of Sterling since the Brexit vote which has drove up the cost of imported goods significantly.
Although the Brexit vote and the devaluation of Sterling following it was more than a year-and-a-half ago, many retailers buy their stock a year or two in advance, which means they have only just started to feel the impact of costlier imports in the last few months.
For the same reason the recent rally in Sterling, which if it lasts should bring down the cost of imports, is not yet benefiting consumers. In fact, taking goods prices separately from services, inflation at 3.4% is higher than it’s been for more than five years.
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