Inflation to fall below target?

Reserve Bank of India head office in Mumbai | Punit Paranjpe  AFP  Getty Images

Reserve Bank of India head office in Mumbai | Punit Paranjpe AFP Getty Images

Inflation plunged to 1.8 per cent in January the lowest rate for two years, official statistics revealed today.

The headline reading is expected to decline to +1.9% y/y last month following the +2.1% y/y reading seen in December (as per the above). However, the move was in line with the BoE forecast for this month.

Head of inflation at ONS Mike Hardie said: "The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time previous year".

The top two year fix from Gatehouse Bank pays 2.35 per cent, now some 0.55 percentage points above inflation.

Before last month, the last time a one-year fixed-rate matched inflation was November 2016, and back then the CPI was only 1.2 per cent. The inflation rate for services like education and health also fell, bringing down the level of core inflation, after excluding volatile items like food and fuel.

India's economy is slowing, hit by reduced growth in consumer spending and in the farm sector.

While Ben Brettell, senior economist at online brokerage Hargreaves Lansdown, said the inflation data is not going to change the Bank's thinking about the economy or interest rates.

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Changes in interest rates are normally only made in response to movements in inflation but are important for financial markets because of the push and pull influence they can exert over global capital flows.

The purchasing power of Dollars is dragged down by inflation.

The Bank of England said this month that United Kingdom economic growth will likely slow further in 2019 given weakening demand from overseas and a period of increased "Brexit uncertainty" that are expected to reduce activity in the UK.

Economists said it facilitated the Bank's "wait and see" approach on interest rate hikes ahead of Britain's departure from the EU.

Prime Minister Theresa May says she is attempting to negotiate a replacement of the so-called Northern Irish backstop in the EU Withdrawal Agreement, as MPs rejected her proposed exit plan in a record breaking landslide last month.

"Our suspicion is that inflation will spike significantly higher if the United Kingdom leaves the European Union without a deal". The Reserve Bank of India, which reduced the key lending rate by 0.25 per cent last week, mainly factors in CPI-based inflation while arriving at its bi-monthly monetary policy.

United Kingdom inflation rose from 0.5% in June 2016 to 3.1% by November 2017 and core inflation increased from 1.4% to a peak of 2.7%. The fall in the value of the pound after the Brexit vote had pushed inflation higher, squeezing household disposable income as it pushed up the cost of imported goods.

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