CPI inflation fell to 1.8% in January, down from 2.1% in December 2018, according to the latest ONS data.
December's figure is the lowest inflation rate seen since January 2017, when it was also 1.8%, and is the first time in two years that CPI inflation has been below the Bank of England's 2% target.
CPIH inflation, which is now used as its headline measure and which includes owner occupiers’ housing costs, was also 1.8% in January, down from 2.0% in December.
The ONS said the largest downward contribution came from electricity, gas and other fuels, with prices falling between December 2018 and January 2019.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “Despite the UK labour market remaining tight, political and economic uncertainty have held prices down. With oil prices low on the back of weaker global demand and air fares tumbling, inflation has kept close to the Bank of England’s target.
“The sluggish UK economy is symptomatic of the wider picture. Central banks across the globe have taken their foot off the stimulus pedal and we are now seeing the results. With idiosyncratic issues in both the US and Europe slowing growth, Brexit affecting the UK, trade disputes, and a Chinese slowdown, we’re indisputably in a mid-cycle slowdown. A global recession seems a far flung prospect, however in the UK Carney must be flexible and data-driven, putting decisive monetary policy on the back burner until greater political and economic clarity emerges.”
Ben Brettell, senior economist at Hargreaves Lansdown, commented: "The chance of a UK interest rate rise was already galloping over the horizon, as Brexit uncertainty has put policymakers in a straitjacket lately. Today’s inflation figures provide further reason for the Bank of England’s rate-setting committee to sit on their hands.
"Economists had expected a smaller drop to 1.9%. Lower energy costs were the main cause, with prices falling between December and January compared with rising prices a year ago.
"The core rate of inflation, which excludes the more volatile components like energy and food, was unchanged at 1.9%. Financial markets’ reaction was muted, with sterling little changed and the FTSE already up slightly on renewed hopes the US and China might resolve their differences.
"In truth today’s numbers aren’t going to change the Bank of England’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."
Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, added: “Whilst hitting below the Bank of England’s inflation target feels like a reason to cheer, we should also be careful what we wish for. Last week the Bank of England’s Monetary Policy Committee voted unanimously to keep interest rates unchanged and after today’s news and with forecasts that inflation may fall further still in 2019, any expectations for a rate hike later this year are likely to be put to bed. To compound matters for the BoE, the recent GDP figures showing productivity fell by 0.4% in December and ongoing Brexit uncertainty will put further pressure on the MPC to leave current monetary policy unchanged."