• The annual rate of UK CPI inflation picked up to 0.3% in January from 0.2% in December 2015, in line with consensus expectations though a little below our and the Bank of England staff expectation of a rise to 0.4%. The ‘core’ rate – excluding energy, food, alcohol and tobacco – eased back to 1.2% from 1.4% in December, a little softer than expected, as an upward push from a surge in air fares in December largely unwound. RPI inflation rose to 1.3% y/y in January from 1.2% in December, with the RPI index at 258.8 as per our forecast, leaving the RPI-CPI basis unchanged at 1.0pp.
  • The rise in inflation in January mostly reflects energy-related base effects. Specifically, January saw a 2.6% decline in forecourt fuel prices, largely as expected, but as the fall was smaller than between December and January last year, it results in a rise in inflation. Energy base effects should impart a further modest boost to annual inflation in February. But the inflation outlook from March onwards remains one of a very gradual uptrend towards target. Notably, it will need to overcome cuts to retail gas tariffs announced by all of the ‘Big 6’ utilities, which take effect in March and April, and are likely to be repeated again in the autumn. Nevertheless, the marked recent weakening of the exchange rate, alongside the residual strength of underlying domestic costs should still provide some upward impetus to inflation trends further ahead. The gradient of this is likely to remain very shallow, and we do not expect CPI to reach 1% until the end of 2016.

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