UK inflation rate slips to 3%, first decline in six months

The decline took the rate to 3% from 3.1% in November, which was the fastest in more than five years. A core measure of consumer-price growth slipped to a five-month low of 2.5%.

The pound weakened after the data were published and was trading at $1.3772 as of 10:37, down 0.2% on the day.

The figures may be the start of a turning point for inflation as the effect of the pound’s depreciation following the 2016 Brexit referendum starts to fade. Economists and the Bank of England forecast a slowdown this year, with the latter predicting a 2.4% level at the end of 2018.

The decline in December was largely driven by a technical reweighting of airfares in the inflation basket. The Office for National Statistics said it’s too early to say if the move is the “start of any longer-term reduction in the rate.” Services inflation slowed to 2.5% in December, the weakest in nine months.

An inflation slowdown would bring relief to households who have seen their pay fail to keep up with price increases. Still, economists surveyed by Bloomberg see growth in household consumption weakening this year and only improving slightly in 2019. It will remain below its recent average in both years.

While headline inflation is predicted to cool, what matters for Bank of England policy makers is the development of domestic price pressures coming from low unemployment and a squeeze on supply. The bank raised interest rates in November for the first time in a decade and said more hikes may be needed in the coming years.

What our economists say:

“UK inflation has begun a march downward and the risk to inflation expectations is passing – that will give the Bank of England room to breathe. Bloomberg Economics sees modest labour market weakness keeping rates on hold in 2018, but the next move will be a hike.

Though annual inflation is falling, that says more about price changes a year ago than now – don’t expect it to drive a big jump in quarterly real consumption growth.” - Jamie Murray and Dan Hanson.

Part of the upward pressure on inflation is coming from weak productivity growth, which has plagued the UK economy since the recession. However, policy maker Silvana Tenreyro gave an optimistic view in a speech on Monday, saying it should pick up in the medium term, which could change the interest-rate outlook.

“A different outturn for productivity growth would affect that policy rate path,” Tenreyro said, adding that her analysis “leads me to think that in the medium-term, the risks to productivity may be skewed to the upside.”