UK inflation holds steady at 4% in January as lower food prices help offset higher energy costs

Inflation in the U.K. held steady at 4% in January as lower food prices helped offset an increase in energy costs

Britain Economy (Copyright 2023 The Associated Press. All rights reserved)

Inflation in the U.K. held steady at 4% in January as lower food prices helped offset an increase in energy costs, official figures showed Wednesday.

The reading was better than expected as most economists expected inflation to rise modestly to around 4.2%.

The Office for National Statistics said the main downward contribution to the figure was a monthly drop in food prices of 0.4%, which was the first since September 2021.

"This is welcome news for low-income households who spend a higher proportion of their income on food," said Lalitha Try, economist at the Resolution Foundation think tank.

Though interest rates appear to have peaked, the Bank of England has expressed caution about cutting interest rates too soon as lower borrowing rates may bolster spending and put renewed upward pressure on prices.

The Bank of England has managed to get inflation down from a four-decade high of more than 11%, by raising its main interest rate aggressively from near zero to 5.25%.

It has held the rate there since August and there are hopes that cuts may soon be on the agenda, once there is clear evidence that inflation will remain around the 2% target for a period of time. The bank's last set of forecasts earlier this month showed inflation remaining above the target for much of this year and next.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the journey back to the target “should now accelerate," with a sizeable fall in energy bills from April and lower food costs likely.

“While interest rates could start falling over the summer, large tax cuts in next month’s budget would risk pushing the Bank of England to keep policy tighter for longer by refueling concerns over inflation,” he said.

High inflation was first stoked by supply chain issues during the coronavirus pandemic and then Russia’s full-scale invasion of Ukraine, which pushed up food and energy costs.

While the interest rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on the British economy, which is barely growing.

Whatever happens on the interest rate front in the coming months, it’s likely that relatively high borrowing rates and low economic growth will be the backdrop for the general election which has to take place within a year. That’s a concern for the governing Conservative Party, which opinion polls say is way behind the main opposition Labour Party ahead of the vote.