British inflation fell to a two-year low in January, dipping below the Bank of England's target and offering some relief to consumers who have tightened their belts ahead of Brexit. Consumer prices rose at an annual rate of 1.8 percent, down from December's 2.1 percent, as a new government cap on household power bills kicked in.
A Reuters poll of economists had forecast 1.9 percent. British consumers have been pressured by inflation caused by the slump in sterling against the dollar and euro after the Brexit referendum in June 2016. Inflation peaked at a five-year high of 3.1 percent in November 2017, when households faced much greater price increases than the European Union average.
That difference is now negligible, helping the Bank of England as it holds off on fresh interest rate hikes pending the outcome of Britain's Brexit stand-off with the rest of the EU. "The further falling back in inflation facilitates the Bank of England maintaining a 'wait and see' approach on interest rates until after the UK leaves the EU," Howard Archer, chief economic adviser to the EY ITEM Club consultancy, said.
British government bond prices rose after the data, pushing 10-year yields down by 2 basis points. But Allan Monks, an economist with JP Morgan, said the impact of the power price cap would be short-lived because tariffs were likely to rise by around 10 percent in April. "Unlike when the cap is lowered, energy firms don't have to automatically raise prices when the cap is lifted. But we expect they will," Monks said. On Wednesday, npower became the third of Britain's six major energy providers this week to say it would raise prices from April.
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