UK inflation might be easing – but don’t expect prices to fall

theguardian.com:

Britain’s cost of living crisis is still raging but inflationary pressures are now easing. Fears of a wage-price spiral look overblown. Bank of England interest-rate setters will take comfort and the peak in official borrowing costs is close at hand.

Those with the three big conclusions from the latest Office for National Statistics data showing a sharper than expected drop in the annual consumer prices index measure of inflation from 10.5% in December to 10.1% in January. Prices normally fall in the first month of the year due to post-Christmas sales, but the drop was larger in January 2023 than in January 2022.

Prices are still rising fast, and poorer households are feeling the impact more than their richer neighbours. The annual rate of food inflation currently stands at 16.7% while the cost of gas is up almost 130% on a year ago. A falling inflation rate doesn’t mean prices are coming down, it simply means they are rising less quickly.

That said, there are now clear signs inflationary pressures are abating. The headline rate of CPI inflation is still running at five times its official 2% target but it fell for a second month. Core inflation – which excludes food, energy, alcohol and tobacco – dropped from 6.3% to 5.8%.

Threadneedle Street has been closely monitoring inflation in the service sector to see if businesses are granting higher pay awards to workers and then passing on the extra costs to their customers.

It will be of some relief to the Bank’s monetary policy committee that service sector inflation fell from 6.8% in December to 6% in January. The ONS also monitors inflation at the early stage of the production process by measuring the prices manufacturers pay for fuel and raw materials, and the cost of goods