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UK inflation eases but outlook depends on Brexit

December 19, 2018
Pro and anti Brexit demonstrators wave their placards and flags outside the Houses of Parliament in London, Tuesday Dec. 18, 2018. The British Cabinet was meeting Tuesday to discuss ramping up preparations for Britain's departure from the European Union without a deal, after Prime Minister Theresa May postponed Parliament's vote on her divorce agreement until mid-January. (AP Photo/Alastair Grant)

LONDON (AP) — Inflation in Britain rose in November by its weakest rate in 21 months, a development that’s likely to cheer consumers as they get ready for some last-minute Christmas shopping.

The Office for National Statistics said Wednesday that consumer prices were up 2.3 percent in the year to November, down slightly from the previous month’s 2.4 percent.

A fall in gas prices at the pump was the main reason behind the decline. Oil prices have fallen sharply over the past few months largely because of oversupply in the oil market.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the November decline “marks the beginning of a sharp fall over the coming months, which will be driven primarily by lower energy prices.”

Inflation nevertheless remains above the Bank of England’s target rate of 2 percent. It has largely been above that level since the Brexit vote in June 2016, which caused a sharp fall in the pound and a consequent increase in the price of imports.

Under normal circumstances, the bank would be considering raising interest rates again, not least because wages are rising at their fastest rate in a decade, which can stoke inflation. But the bank is holding off due to a lack of clarity over how Brexit will affect the economy.

“If wage growth continues to outperform then the Bank of England will be keen to continue hiking rates in 2019, potentially much earlier than markets currently anticipate,” said James Smith, developed markets economist at ING.

“However, this relies on a workable Brexit solution being found, and of course, this remains a ‘big if’.”

Prime Minister Theresa May pulled a vote in Parliament last week on her Brexit deal with the European Union because she knew she would lose. Though another vote will take place in mid-January, there are widespread doubts whether she can win lawmakers’ approval. Should the deal be rejected, it’s unclear what would happen next — anything from a second referendum on Britain’s membership of the EU to a “no-deal” Brexit is possible.

On Thursday, the bank is set to keep its main interest rate on hold at 0.75 percent and warn of the potential damage to the British economy if the country crashes out of the EU with no deal.

Last month, it said that in a worst-case scenario in which Britain leaves the EU without a deal and without a transition period to smooth out the process, the British economy would suffer one of its worst recessions in 100 years. Inflation would likely rise to around 7 percent as the pound endures another precipitous decline, it said.

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