Inflation fell below the Bank of England’s target for the first time in two years in January thanks to the new cap on energy prices.
Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) fell to 1.8% last month, the largest drop since 2016, from 2.1% in December.
January inflation missed economists’ expectations and undershot the central bank’s target of 2%.
Sterling held firm after the news, at 1.289 US dollars and 1.138 euros.
Inflation was dragged down by lower electricity, gas and petrol prices between December and January, which was partially offset by lower air fares.
The main driver for inflation was the new energy price cap on standard variable tariffs recently introduced by energy watchdog Ofgem.
Mike Hardie, head of inflation at the ONS, 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 last year.
“House prices continued to grow, albeit at the lowest UK annual rate since July 2013, with growth in the North East and London lagging behind Northern Ireland, Wales and the West Midlands.”
At the pumps, motorists had lower fuel costs last month, with petrol down by 2.1p per litre on the month to 119.6p. Diesel also fell by 2.4p to 129.5p.
Yael Selfin, chief economist at consultancy KPMG UK, said January’s inflation data gives Bank policymakers “ample room” to wait before they raise interest rates again as Britain’s leaves the European Union.
“In the current climate of heightened uncertainty in regards to the Brexit process, businesses will benefit from a supportive monetary policy.
“Waning UK business investment, and potential short-term financing difficulties for many SMEs (small and medium-sized enterprises) in the event of a no-deal Brexit, will require the Bank of England to keep rates low this year, and the latest inflation figures provide the MPC ( the Bank’s Monetary Policy Committee) with a mandate to do that.”
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.
“Assuming some kind of smooth Brexit, it should be able to gently nudge rates up over the next couple of years.
“Of course if we get a cliff-edge, no deal Brexit, all bets are off – a drop in sterling would likely see a sharp rise in imported inflation, but I’d expect the Bank to look through this and cut rates to support the economy.
Mr Brettell added that currently the “inflation genie is still firmly in the bottle, despite unemployment at multi-decade lows”, which has made the Bank’s job easier over the past few years.
Meanwhile, heavy discounting from retailers saw clothing and footwear prices falling by 1.3% for the year to January, which had a small downward pull on inflation.
The Retail Prices Index (RPI), a separate measure of inflation, was 2.5%, down from 2.7% in December.
The CPI, including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 1.8% in January, down from 2% in December.