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Price cap cools inflation to lowest level since January 2017

Contributions from fuel prices and the energy price cap help bolster household spending power in January, official figures show.

Price cap cools inflation to lowest level since January 2017

The rate of inflation has hit its lowest level in two years, according to official figures showing a strong contribution from the energy price cap.

The Office for National Statistics (ONS) reported the Consumer Prices Index (CPI) measure easing to 1.8% in January - down from 2.1% the previous month.

 

It was a sharper decline than economists had expected, though experts had predicted the annual rate of price growth would come under the Bank of England's 2% target for the first time since January 2017.

The energy price cap - which was imposed on so-called default tariffs by the industry regulator on 1 January - had such an influence on the inflation figure because standard variable tariffs are the only household energy charges included in the basket of goods and services used to calculate CPI.

The ONS also pointed to cheaper petrol in January compared to a year ago.

Diesel pump
Image: Weaker demand for oil in a flooded market has helped petrol costs ease

Inflation, which surged after the Brexit referendum result because of the weaker pound driving up import costs, has eased markedly since August last year.

It helps boost household spending power as weaker price growth has combined with higher wages and record employment.

But this period has also coincided with the build-up to Brexit - the result of which remains shrouded in uncertainty.

Philip Hammond 

That has knocked confidence in corporate investment and consumer spending alike at a time when the wider global economy is also suffering the effects of the US/China trade war.

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Weaker oil prices - a consequence of fresh glut fears amid dampened world demand - helped UK pump prices down by over 2p-a-litre for both unleaded and diesel during January, the ONS figures showed.

Clothing and footwear costs were also lower - by 1.3% over the 12 months.

The contribution to weaker inflation from the price cap could be limited as Ofgem has already announced that the maximum charge will rise from 1 April to account for higher wholesale energy costs for suppliers.

Three of the so-called "Big Six" suppliers E.ON, EDF Energy and nPower have already said they will pass on that increase to their customers.

There was little movement in financial markets after the ONS announcement - with shares having risen on hopes of progress on resolving the trade war.

Andrew Wishart, UK economist at Capital Economics, said of the data: "If wage growth has held steady at the pace recorded in November, the fall inflation in January would push real pay growth up to 1.4%, the fastest since 2016, providing good reason to think that household consumption will support the economy this year.

"In fact, the drag on inflation from the Ofgem price cap will be reversed in April when the cap rises and food price inflation is set to rise.

"So inflation will probably be back above the target within a matter of months."

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