Modest oil price changes expected to push inflation upwards


Inflation is expected to hit 0.3% when official figures for January are published on Tuesday, as low oil prices lift marginally and edge up the cost of living.

The Consumer Price Index (CPI) measure of inflation has teetered between minus 0.1% and 0.1% over the past year, straying into negative territory in April, September and October. CPI inflation is currently 0.2%

The price of oil fell by 2.6% last month, but economists predict it will help drive inflation, as fuel price deflation eases due to heftier falls in January 2015.

Brent Crude is around 32 US dollars a barrel, but is around 70% lower than its peak price in the summer of 2014.

The Bank of England cut its growth forecasts for the UK economy and voted to keep interest rates on hold at 0.5% at the beginning of this month.

It revised down its forecast for UK GDP for the next three years, to 2.2% for 2016, 2.4% in 2017 and 2.5% in 2018.

Global markets have been volatile in recent sessions, with banking stocks dragging the FTSE 100 Index into the red amid fears over the impact of slowing world growth, led by easing expansion in China, the world's second largest economy. The London market is down by some 8% since the start of this year. 

The Office for National Statistics also released the latest data on UK trade on Tuesday, showing Britain's trade gap had grown to its highest level since 2010 last year, as the UK saw an £8.1 billion plunge in the export of goods.

It said the deficit - the difference in value between UK imports and exports - widened by £300 million to £34.7 billion in 2015.

Chief UK and European economist at IHS Global Insight Howard Archer is expecting inflation to come in ahead of consensus at 0.4%.

He said January's rise will reflect "the fact oil prices fell much more sharply in January 2015 than they did in January 2016".

He added: "There may also have been a reduced year-on-year fall in food prices in January."

Economists at Capital Economics are also expecting inflation to hit 0.4%.

It stated: "Overall, inflation looks set to continue rising in the coming few months. Based on our forecast for oil prices to gain a bit of ground, inflation should be back at around 1% in the third quarter of this year. However, the path back to the 2% target will probably be a long one."

The Bank of England targets a CPI inflation rate of 2%.