UK December inflation came in higher than expected, though it still fell the most since 1992. From the FT:
UK inflation fell in December by the most since 1992 as the cut in VAT came into effect and stores slashed prices in an attempt to attract customers, official data out on Tuesday showed.
The consumer price index fell to an annual rate of 3.1 per cent last month, compared to 4.1 per cent in November, the Office for National Statistics reported, a higher level than the 2.7 per cent that economists had expected, but still a sharp decline.
The ONS said that the cut in VAT from 17.5 per cent to 15 per cent made the largest contribution to the drop in inflation, but that falling petrol prices, and bigger discounts in stores over December than in the previous year also contributed. It said that around two thirds of the prices at shops had been reduced to reflect the VAT cut.
Bank of England governor Mervyn King has already warned in his last letter to the Chancellor that inflation could fall below 1 per cent this year. It looks like he won’t have to write another letter explaining why inflation’s falling just yet. By a curious quirk of pricing, however, he should probably be writing a letter to British Airways in thanks for today’s numbers.; a large portion of that inflation upside seems to have been caused by a 34 per cent jump in airline tickets.
From the Office for National Statistics data:
JP Morgan economist Malcolm Barr picks up on the oddity:
The slight upside surprise in core inflation was the resultant of two movements within the category: a greater than expected fall in core goods was more than offset by a jump upward in airline ticket prices (which rose over 30% in both m/m and oya terms). Given the volatility of the latter we would not place too much weight on it, while anecdotes and the BRC shop price data had warned that pre Christmas discounting of goods may have been more extensive than we had assumed. Core goods prices recorded a 1.7% m/m nsa fall in the month, taking the over year ago rate down from -1.5% to -3.7%oya. The extent to which this reflects the VAT cut versus other factors will be subject to debate, but full pass through of the VAT cut in a single month would have generated a 2.1% fall. Service sector pricing outside of transport prices showed a more limited impact from the VAT cut, but we expect more will show up as prices are reset in January.
JPM, however, doesn’t see the higher air fares offsetting deflationary pressures forever:
A first cut at a revised set of forecasts after this morning’s data is [shown to the left, click to enlarge].Beside updating for this morning’s release we’ve made two changes. The first is to allow for a reversal of the sharp increase in airline ticket prices in January. Second is that our utilities team have advised us to push the reductions in domestic utility bills we had pencilled in back by a month or so in the forecast, as the providers appear to be trying to keep prices unchanged until the spring.
Related links:
December consumer price indices – Office for National Statistics
UK inflation falls to 3.1% – FT
Flying forces – FT Alphaville