Basket Reweighting Generates Pronounced Fall in Services CPI

UK JAN CPI -0.6% M/M (FCST -0.4%); DEC +0.4% M/M

UK JAN CPI +10.1% Y/Y (FCST +10.3%); DEC +10.5% Y/Y

UK JAN CORE CPI -0.9% M/M, +5.8% Y/Y (FCST +6.2%); DEC +6.3% Y/Y

• The January inflation data for the UK saw downside surprises as prices declined -0.6% m/m, easing 0.4pp to +10.1% y/y.
• Transport was the key downwards driver in January, down -3.6% m/m alone and decelerating from +6.5% y/y in December to +3.1% y/y. The reversal of the December spike in airfares was the key driver.
• Core inflation fell -0.9% m/m, cooling 0.5pp to +5.8% y/y, the lowest since June 2021. Services inflation slowed by 0.8pp to +6.0% y/y, largely driving the lower headline print. This was again largely due to transport passenger services, and to a lesser extent restaurants and cultural services.
• This data implements the new 2023 expenditure weights. According to an ONS spokesperson, airfare weights increased over a threefold, contributing to the marked downwards effect on headline CPI and to a lesser extent the increased weighting of accommodation services.
• As such, the fall in the MPC's closely watched core-reading will likely be taken with a grain of salt, especially following yesterday's uptick in wages. However, the data confirms inflation is moving in the right direction.