UK could beat US and euro zone to sub-2% inflation – Capital

UK could beat US and euro zone to sub-2% inflation – Capital

LONDON (Reuters) – Britain, which has had the strongest inflation among the world’s big rich economies for much of the past two years, could see its pace of price growth slow to below 2% before the United States and the euro zone, a consultancy said on Friday.

Capital Economics said inflation in Britain could fall to 1.7% in April when it was likely to be 2.0% in the euro zone and 2.6% in the United States.

The Bank of England has said it plans to keep interest rates high “for an extended period” to ensure the surge in inflation – which topped 11% in October 2022 – does not cause long-term problems in the economy. But investors are betting on a first rate cut as soon as May after a recent weakening of inflation.

Britain’s headline inflation rate is expected to have edged down to 3.8% in December from 3.9% in November when official data is published on Wednesday, according to economists polled by Reuters.

U.S. and euro zone inflation edged up last month, according to recently published figures.

Although Britain’s inflation rate is likely to rise in January, in part due to an increase in regulated energy tariffs, Capital said it would resume falling thereafter because of big increases in price growth in early 2023.

“These drags aren’t as powerful elsewhere,” Paul Dales, chief UK economist at Capital, said in a note to clients.

“If we’re right, then in April, inflation in the UK will be lower than in the US and the euro-zone for the first time in two years.”

Underlying inflation would probably not fall as quickly as the headline rate and a jump in shipping costs caused by tensions in the Red Sea posed a risk to prices, Dales said.

But he predicted the BoE would cut rates for the first time in June.

(Writing by William Schomberg, Editing by Kylie MacLellan)