Subdued inflation

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Annual consumer price inflation continued to edge down in January, easing to a 50-month low of 1.9%. Following a period in 2010-12 of high and often volatile inflation, the CPI rate has followed a downward trend from mid-2013 and the January reading marks the first time since late 2009 that headline inflation has come in below the Bank of England's 2% target. However, UK inflation still remains quite a bit higher than average inflation in the euro zone (0.7%).

CPI inflation back below 2% target(annual rate; %)

Source: Office for National Statistics.

UK consumer prices declined by an average of 0.6% over the month. According to the ONS, the largest contributions to the fall came from lower prices for recreational goods, cultural services, furniture and household equipment—an indication of ongoing retailer discounting.

There was little overall impact on the annual inflation rate from gas and electricity prices, as the recent tariff rises implemented by the "big six" energy companies were of a similar level to those a year ago.

Output (factory gate) prices edged higher in January, but only by a modest 0.9% year on year. The weaker trend in international commodity markets was evident in data showing a further decline in input prices. The overall price of materials and fuels bought by UK manufacturers for processing declined by 3.1% in the year to January 2014, the sharpest contraction in more than four years.

The Bank of England's latest inflation forecast published last week was benign and we expect consumer price inflation to hover just below 2% over the coming months.

Underlying price pressures remain subdued, against a backdrop of still weak nominal wage growth (real incomes are still being squeezed), limited consumer purchasing power and relatively soft global commodity price trends. Import price pressures will also be contained by the strengthening of the sterling exchange rate over recent months.

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