Tue Feb 13 03:30:00 CST 2018

Consensus Actual Previous
Month over Month -0.6% -0.5% 0.4%
Year over Year 2.9% 3.0% 3.0%

Consumer prices are seasonally weak at the start of the year and this January was no different. However, a 0.5 percent monthly decline was a little shallower than expected and firm enough to leave the annual inflation rate unchanged at 3.0 percent, a full percentage point above target. The yearly rate has now posted 3.0 percent in four of the last five months.

The main downward pressure on the monthly change in the yearly CPI rate came from transport which subtracted 0.04 percentage points as fuel prices rose by less than in January 2017. Food and non-alcoholic drinks (minus 0.03 percentage points) had the other most significant negative impact. On the upside, the only boost of note came from recreation and culture (0.07 percentage points). The core CPI was down 0.8 percent versus December which saw the annual underlying rate jump a couple of ticks to 2.7 percent and so fully unwind its year-end fall. The CPIH, the measure preferred by the ONS, declined a monthly 0.4 percent for a flat yearly rate of 2.7 percent.

Coming just after the BoE's hawkish commentary last Thursday, today's January prices data will leave intact expectations that Bank Rate will be going up again before very long. The March 22nd MPC meeting is probably still a little too early but the acceleration in underlying inflation should ensure that May 10th remains firmly on investor radars.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.