British inflation falling faster than central bank forecast

Figures released Tuesday showed British inflation fell for the third month running, which economists said indicated the central bank had underestimated disinflationary pressures. The inflation rate, as measured by Consumer Price Index (CPI), fell to 2 percent in December 2013, down from 2.1 percent the previous month. This is the first time the inflation rate has hit the Bank of England (BOE)'s target figure of 2 percent since 2009. Daiwa Capital Markets said in a note that it believed that the BOE had underestimated the disinflationary pressures in the economy in its most recent Inflation Report, in November. The BOE had forecast that a fall to 2 percent would be reached only in the first quarter of 2015. Lower food prices was a driver in the downward movement of CPI, however higher transport and fuel costs were also evident and may drive the index upwards in the coming months. HSBC Global Research chief Britain economist Simon Wells said that the BOE had overestimated inflation pressure throughout the second half of 2013. James Knightley, chief Britain economist with ING Bank, said this is the first time the BOE target has been met since November 2009 and reflected a big slowdown in food price inflation, from 2.8 percent in November to 1.9 percent in December. This was joined by a slowdown in service price inflation to 2.4 percent, once more the lowest such inflation rate since November 2009, said Knightley. Utility bill hikes made an upward contribution, said Knightley, but that will be felt more in the January data released next month. Producer price inflation remained benign with input prices falling 1.2 percent month on month, partly as a result of strong sterling keeping import prices down, said Knightley. The economist added that output prices rose just 1 percent year on year. "With pipeline inflation pressures at such low levels there is growing optimism that consumer prices will stay close to target this year," said Knightley. "With the labor market strengthening we will, hopefully, see wages start to pick up to the extent that incomes are rising faster than the cost of living," he said. Wages are currently going up at about 0.9 percent annually, far below the inflation rate. Knightley said upward pressures on wage growth would "ease the squeeze on household finances and allow consumer spending to continue growing strongly," providing further support for the continuing recovery.