UK CPI Preview: Forecasts from six major banks, a temporary pause in the disinflationary process

We expect headline CPI at 4.1% YoY and core at 5.0%.

UK headline inflation likely edged up to 4.1% YoY in January – matching the MPC's latest forecast – in part due to an increase in Ofgem's energy price cap. Core inflation likely remained at 5.1% YoY, while services inflation probably rose a touch more than the MPC expects (6.7% YoY). Uncertainty is particularly high for this print, in part due to the new CPI weights and notable volatility in airfares. Looking ahead, we continue to look for headline inflation to come down quickly starting in March and fall below the 2% target in April.

CPI inflation is expected to rebound (4.6% YoY) on the back of a renewed rise in Ofgem’s household energy price cap, while core inflation is also expected to pick up on continued strength in services inflation.

We expect both headline inflation and core to have rebounded by 0.1pp in January to 4.1% and 5.2%, respectively. But don’t worry. This is just a temporary blip in the disinflation process. Primarily, the increase is driven by a base effect in the services component due to a sharp decline in air fares and a tripling in its weight in January 2023. Along with airfares possibly causing some surprises again this year, cultural services inflation may reverse the upside surprise in December, but we believe this should be offset by stronger restaurant inflation. Relative to the BoE, we see a stronger rebound in services inflation to 6.9% vs. the Bank’s estimate in the February MPR of 6.6%. 

For the January CPI, base effects should see a modest uptick in some key inflation figures. The consensus forecast is for headline inflation to firm to 4.2% YoY, and core inflation is also expected to tick up to 5.2%. Beyond January, however, the downward trend in UK inflation is expected to resume.

We expect headline inflation to accelerate marginally this week from 4.0% to 4.1%. Sequential inflation – excluding energy – will likely remain very close to pre-Covid rates at just 0.1pp above. We expect services inflation in a 6.7%-6.8% range but overall, the MPC’s preferred measure of underlying inflation is likely to remain flat at 6.4%.