Inflation slows in January to 2.7%

CPI annual inflation – the Government's target measure – was 2.7 per cent in January, down from 3.0 per cent in December, according to the Office for National Statistics (ONS).

The largest downward effect on the CPI annual rate came from transport costs. Prices of fuels and lubricants fell this year, but rose a year ago. There was an additional large downward effect from air travel, mainly due to changes in the cost of fares to European destinations.

Other large downward contributions came from food and non-alcoholic beverages, with prices falling by more than a year ago across a range of produce, and from communication costs, mainly due to increases last year in some landline charges, compared with little change this year. There were also small downward contributions from mobile phone handsets and charges.

The largest upward effect came from alcohol and tobacco, due to cigarette prices increasing this year for all brands, compared with little change a year earlier.

RPI inflation fell to 4.2 per cent in January, down from 4.4 per cent in December. The largest downward effect on the RPI annual rate came from household goods, where there was a record month-on-month fall in furniture prices with widespread price cuts across a range of items. This follows a record increase in the previous month.

Housing costs excluded from the CPI had a large upward effect on the RPI this month, mainly due to the mortgage interest payments component, with some lenders passing on January's quarter point increase in the Bank rate. A further small upward contribution came from the depreciation component (the amount needed to maintain the dwelling at constant quality). The other main factors influencing RPI were similar to those affecting the CPI.

RPIX inflation – the all items RPI excluding mortgage interest payments – was 3.5 per cent in January, down from 3.8 per cent in December.

As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate is above average for the European Union as a whole. The provisional inflation rate for the EU 25 in December was 2.1 per cent, compared with the UK rate of 3.0 per cent for the corresponding period.

Barry Naisbitt, Abbey's chief economist, comments: "Today's inflation figures will have come as some relief to the Bank of England. At 2.7% in January, the rate of annual (CPI) inflation was below market expectations and, more importantly, below December's decade high 3% rate. If today's good news continues, the Governor will not have to write a letter of explanation to the Chancellor for inflation over-shooting its target range. Despite today's dip in inflation, the Bank of England will be remaining vigilant about inflation. It will want to ensure that inflation returns sustainably to its 2% target at a time when pay settlements are being set against a background of headline RPI inflation of over 4%. If energy prices remain subdued relative to last year, the outlook is for inflation to head down close to 2% around the middle of this year."