UK January CPI falls to 3.6%, as expected -UPDATE

LONDON (ShareCast) - The consumer price index (CPI (Berlin: CEJ.BE - news) ) for the United Kingdom fell at a 0.5% month-on-month pace in January, to reach a year-on-year rate of 3.6%, according to the latest data from the Office for National Statistics (ONS). The analyst consensus estimate was for a reading of 3.6%. The fall in the year-on-year rate of change in the CPI follows that seen last month, when it retreated to a year-on-year rate of 4.2%, from 4.8% the month before. The two month drop in prices is the largest since November (Stuttgart: A0Z24E - news) 2008, when the CPI fell by 1.4 percentage points, and is the lowest since the 3.3% reading seen in November 2010. The main reason behind the retreat in prices is a large 'base-effect' as last year´s rise in the rate of value added tax, to 20% from 17.5%, dropped out of the calculations. ONS estimated that it added 0.76 percentage points to the CPI 1-month rate of change in January 2011. DETAILS In terms of month-on-month rates of change, food prices fell by 0.4%, followed by those of clothing&footwear (-4.9%), furniture&household goods (-2.2%), transport (-0.7%), communications (-0.3%) and miscellaneous good and services (-0.1%). On the other hand, prices of alcohol&tobacco rose by 1.9%, along with those of housing&household services (0.2%) and health (0.7%). Prices in recreation & culture, education and restaurants & hotels remained flat. The retail price index (RPI) stood at 3.9% in January 2012, down from 4.8% in December 2011, the lowest it has been since February 2010, when it stood at 3.7%. COMMENTARY Commenting on the data after its release, economists at Barclays Capital are indicating that, "it is true that fiscal austerity, the euro area turmoil and tight credit remain serious causes for concern; but falling inflation is a small mercy for which UK households can be thankful. As set out in our most recent quarterly outlook lower inflation is the main source of the recovery we expect to see in aggregate demand later in the year. As inflation drops we expect real household disposable income to grow by 1% in 2012, following a severe 1.6% decline in 2011, and for this to lead to some improvement in household spending. This, in turn, should give companies the confidence to re-start investment." SIR MERVYN WRITES TO THE EXCHEQUER TO EXPLAIN ABOVE-TARGET CPI As is required whenever the CPI deviates by more than one full percentage point from the Bank´s target, the Bank of England´s Governor, Sir Mervyn King, again wrote a letter to the Chancellor of the Exchequer (for the ninth consecutive quarter), explaining why inflation is still above the Bank´s target. In his letter Sir Mervyn reiterated the MPC (KOSDAQ: 050540.KQ - news) 's view about the inflation outlook. He said that above-target inflation is due to several factors (including unexpected increases in VAT, import prices and energy prices), whose influence is now waning and that the rate of increase in the price level is expected to be back to close to target by year end. However, the pace and extent of the fall in inflation "remain highly uncertain," and largely dependent on to what degree slack in the labour market restrains wage growth and how quickly companies move to rebuild profit margins. Furthermore, consumer prices are susceptible to upside risks in oil prices as a result of geopolitical tensions. Having said that, at another point in his letter Sir Mervyn points out that, "the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high." AB