Lower energy costs as well as a waning impact from the pound's sharp fall in the aftermath of the country's Brexit vote have helped consumer price inflation in Britain fall below the Bank of England's target of 2 percent for the first time in two years.
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The Office for National Statistics said Wednesday that consumer prices rose by 1.8 percent in the year to January, down from the 2.1 percent recorded in the previous month. Inflation has been consistently falling since August as the effects of the pound's decline drop out of annual comparisons. The latest decline was further accentuated by a fall in the price of electricity, gas and other fuels.
Inflation is now at its lowest since January 2017, when inflation was also 1.8 percent. Inflation has been above the Bank of England's target for the past two years largely because the fall in the pound after the country voted to leave the European Union in June 2016 ratcheted up the cost of imported goods. The rise in inflation to a cyclical peak of 3.1 percent in November 2017 prompted rate-setters to increase interest rates for the first time in nearly a decade and the benchmark rate now stands at 0.75 percent.
The news that inflation has fallen below target once again helps ease the dilemma facing rate-setters at the Bank of England as they await clarity over Brexit. Should Britain crash out of the EU without a deal on March 29, the bank says inflation could spike higher, which could cause it to raise interest rates — even during a sharp recession.
The Bank of England warned in November that in a no-deal Brexit scenario — with tariffs and other trade barriers put up between the U.K. and the EU and no transition period to help businesses adapt — the British economy could contract 8 percent within months and inflation could rise to almost 7 percent as the pound falls.
"The chance of a U.K. interest rate rise was already galloping over the horizon, as Brexit uncertainty has put policymakers in a straitjacket lately," said Ben Brettell, senior economist at Hargreaves Lansdown. "Today's inflation figures provide further reason for the Bank of England's rate-setting committee to sit on their hands."