British inflation dipped to 2 percent in December – its lowest since November 2009 and within the Bank of England’s target. Part of the move was driven by a fall in prices in Britain’s services sector – which constitutes more than three quarters of the country’s output.
Services inflation, which makes up around 47 percent of the consumer price index, eased to 2.4 percent in December – also its lowest since November 2009. Goods inflation – which is more sensitive to global markets than domestically generated services inflation – edged up to 1.7 percent last month. But it has also come down in recent months as a strengthening sterling pushed down import prices.
The fall has helped the case for the Bank of England to keep interest rates at a record low of 0.5 percent, also giving the government a boost ahead of elections next year. Analysts say weak wage growth may be a reason for more subdued services inflation, but given the strength of the labor market, this trend could be fleeting.
According to Brian Hilliard, chief UK economist at Societe Generale:
“In the UK, we are a price taker … off the world market so our goods prices depend on world goods prices and exchange rates whereas, for services, it’s more determined by the state of the labour market and I think the labour market will actually firm up with this growth pulse that we are experiencing. So my forecast is that services inflation is close to bottoming out.”
He expected unit labour costs to accelerate as growth continues to be strong but productivity sluggish.