Headline inflation rose sharply to 3% in January, driven by a rise in transport and food prices. Wholesale gas prices have remained volatile over the winter months due to cold weather and recent geopolitical developments. We anticipate a further rise in household energy bills from April onwards, with Ofgem likely to announce an increase in the price cap for Q2 next week. This is expected to keep headline inflation above target over the coming year and could potentially see inflation peaking above 3% later this year.
“Today’s rise in headline and core inflation was broadly in line with the Bank of England’s latest forecasts. The BoE will likely look through the increase in headline inflation but closely monitor how underlying price pressures evolve over the coming months. We do not anticipate a further pick up in core inflation, with weak domestic demand likely to curtail firms pricing power. This will allow the MPC to continue gradually easing interest rates this year.
“Core inflation increased to 3.7%, driven by a rise in services inflation which reached 5% in January. Encouragingly however, this was largely driven by a rebound in airline prices and we expect a steady decline in underlying inflation over the course of the year.”
