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UK inflation has dropped to the lowest level for more than three years, fuelled by struggling retailers offering a wider range of discounts in December.
Raising pressure on the Bank of England to cut interest rates, the annual rate on the consumer price index (CPI) dipped to 1.3% in December from 1.5% in November, the weakest since November 2016, according to the Office for National Statistics. City economists had forecast inflation would remain steady at 1.5%.
In the latest signal of economic weakness at the end of last year, the ONS said high street discounting and lower hotel prices had dragged down inflation in December, amid steep reductions in the price of women’s clothing.
It said the biggest discounts were available on women’s casual jackets and cardigans, while there was a notable increase in the number of items listed for sale in December compared with the same month a year ago.
The sharp fall in inflation comes after a torrid Christmas trading period for retailers across the country, with major chain stores including John Lewis, Marks & Spencer and Superdry reporting disappointing sales. Retailers have also warned that sales across the whole of 2019 fell for the first time in 24 years, leading to a wave of job losses and store closures.
Ruth Gregory, the senior UK economist at the consultancy Capital Economics, said that lower utility prices coinciding with the energy price cap in April could lead inflation to fall closer to 1% later in the year.
“The figures might be enough to tip the balance on the MPC [monetary policy committee] towards an imminent rate cut. Everything now depends on the economic news over the coming weeks,” she said.
Earlier on Wednesday, Michael Saunders, an independent member of the Bank’s MPC, signalled a readiness to vote for a cut in rates.
Speaking in the run-up to the rate-setting panel’s next meeting on 30 January, he said: “Risk-management considerations favour a relatively prompt and aggressive response to downside risks at present.”
Saunders has voted for a rate cut at the last two MPC meetings alongside Jonathan Haskel, another independent economist on the nine-member panel. However, Mark Carney, the Bank’s governor, Silvana Tenreyro and Jan Vlieghe – two other external members of the MPC – have all indicated a readiness to cut rates within recent weeks, potentially tipping the balance.
Jing Teow, a senior economist at the accountancy firm PwC, said a cut in borrowing costs would also depend on how the economy has performed since December, when the political situation became clearer after Boris Johnson’s unexpectedly decisive election result.
“A modest recovery this year could yet spur further business activity and spending, giving rise to inflationary pressures in the medium term,” she said.
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