UK CPI inflation increased to 0.3% y/y in January 2016 from 0.2% y/y in December 2015 (Danske Bank: 0.4% y/y, consensus: 0.3% y/y) . Core inflation declined to 1.2% in January from 1.4% y/y in December. Both CPI inflation and CPI core inflation are expected to remain subdued in 2016 due to a combination of the past appreciation of GBP and the low commodity prices.
The small increase in headline inflation in January was mainly due to 'Energy' and 'Food, alcoholic beverages and tobacco' which pushed up CPI inflation by 0.14pp and 0.08pp, respectively. The main negative contributor were air fares, which declined 35.8% m/m in January after the large increase of 46.0% m/m in December. This component alone pushed down overall inflation by 0.20pp (and core inflation by 0.27pp).
The Bank of England has made it clear that it is definitely not 'Fed light' and that it is in no hurry to hike rates (see also BoE review: BoE is not 'Fed light' - we now expect first hike in Q1 17, 4 February 2016). There are many reasons for the BoE to stay on hold for a long time: inflation and wage growth are both subdued, inflation expectations have fallen, other central banks (most importantly the ECB) are on an easing bias and Brexit uncertainties loom.
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