UK inflation came in lower than forecast in January, with underlying price pressures not rising as much as markets and the Bank of England had feared.

Consumer prices rose 4 per cent compared with a year earlier, the same pace as in December, the Office for National Statistics said on Wednesday (Feb 14). The BOE and private-sector economists had expected inflation to tick higher to 4.1 per cent.

British finance minister Jeremy Hunt said the government had made “huge progress” in bringing down inflation.

“Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11 per cent, and the Bank of England forecast that it will fall to around 2 per cent in a matter of months,” Hunt said in a statement. 

Services inflation, which is more directly linked to domestic costs, accelerated to 6.5 per cent in January. The BOE had forecast 6.6 per cent, with the rate set to remain well above that of core goods.

While headline inflation is expected to resume its descent  – an increase in energy bills and base effects pushed prices higher last month – officials are taking a cautious approach to easing policy amid continuing tightness in the labour market and signs the economy is picking up.

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On Tuesday, traders scaled back bets on how far the BOE will cut interest rates this year after data showed wage growth cooling less quickly than predicted and unemployment falling in recent months.

Money markets were fully pricing in just two reductions this year, the first of them in September. Until recently, a spring rate reduction had been seen as likely. BLOOMBERG, REUTERS