Why has inflation remained steady and what does it mean for interest rates?

Inflation remained stable in the UK last month, surprising economists who had expected it to rise slightly.

The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation was 4% in January, the same as the month before.

It has made market watchers more hopeful that interest rates might be cut earlier than would have otherwise been the case.

Here the PA news agency explores why inflation has remained stable, and what it might mean for interest rates.

– What is inflation and why has it remained unchanged?

Economists use the word inflation to refer to rises in prices across a set of goods and services that British households tend to buy. If prices fall it is known as deflation.

If inflation is at 4%, as it was in January, it means the same things that cost a household £100 a year ago now cost £104.

This is averaged out across many products, and goods and services that people spend more on are given more weight in the calculations.

Like always, in January, some things went down in price, while others increased.

In the year to January, the category that fell the most was transportation, with costs down 0.5%, while alcohol and tobacco rose the most, up 12.2%.

Inflation has remained unchanged at 4% because some prices went up compared to December, while others fell, but overall they evened themselves out to zero.

– What does it mean for interest rates?

Financial markets have recently been a little less optimistic than previously about the prospects of rate cuts in the near future.

The pessimism came after inflation proved more persistent than expected, with a shock rise in December’s figures.

The Bank of England’s base rate, which influences what mortgage borrowers have to pay, is at 5.25%, its highest since 2008.

There was disagreement among economists about what January’s figures meant for rates.

Pantheon Macroeconomics argued the fact January inflation was lower than expected now makes it more likely we will see a rate cut by the summer.

However Investec said that the data released on Wednesday has not changed its expectations.

– What about mortgage costs?

Over the last few months in anticipation of future cuts to the Bank’s base rate, lenders have started cutting the interest rates they charge on new mortgages.

But in recent weeks a couple of lenders, including Nationwide, had started increasing rates slightly again.

What impact Wednesday’s figures might have on mortgages will depend on whether high street lenders think that it makes Bank rate cuts more or less likely in the coming months.

– Why is my weekly shop still so expensive if food prices are falling? 

One of the headline figures in January’s data was that for the first time since September 2021 food prices fell.

However this is only when comparing January prices to December prices, and the fall is small at just 0.4%.

Compared to a year ago food and non-alcoholic beverages are 7% more expensive, and compared to January 2022 prices are 25% higher.