Here’s an interesting chart, showing how inflation is sizzling in San Francisco, but rather weaker in Washington:

Nick Kilbey, Sales Trader at Foenix Partners, says America’s central bank can afford leave interest rates unchanged for longer - as inflation is looking subdued.
He writes:

Whilst another round of trade talks between the US and China are keeping investors on edge this week, US Inflation provided a distraction as it dropped to 1.6%, the smallest print since June 2017, with lower energy costs the main culprit once again. So far Economic growth in the US has moderated only marginally and the economy remains robust, despite the ongoing dispute with China. However, with broader inflation at 1.6%, it certainly underscores the Fed’s “wait and see” stance and their ability to remain patient.

Capital Economics has dug into the CPI figures, and explains how cheaper energy is helping Americans handle the cost of living.

Gasoline prices fell by 5.5% month-on-month in January, the third consecutive monthly decline of around that magnitude.

However, piped natural gas prices fell by only 0.3% m/m, which barely began to reverse the 5.1% m/m spike in December. With natural gas prices falling sharply, CPI piped gas will drop more markedly in February

At just 1.6%, US inflation is now at a 19-month low.

More reaction to the US inflation figures:

Here’s our news story about the impact that Brexit is having on the construction industry:

Wall Street is expected to open higher in two hours time, as trade deal optimism continues to push shares up.

The Dow Jones industrial average is expected to gain 80 points, or 0.3%, after President Donald Trump said he may let a China trade-deal deadline “slide” if the two sides were making enough progress.

Newsflash: There’s drama in Spain, where the parliament has just voted down the government’s 2019 budget.

That’s a blow to Spain’s socialist government, who have been blocked by an alliance of rightwing parties and Catalan secessionists.

It could trigger early elections, bringing more uncertainty to the euro area. This has knocked shares in Madrid, a little, and pushed up Spanish borrowing costs slightly.

My colleague Sam Jones explains:

Government and PSOE party sources said the snap election date had not been set, although 14 April was most likely, followed by 28 April because [PM Pedro] Sánchez wants a ballot as soon as possible to mobilise left-leaning voters against the threat of the right coming to power.

The Socialists are ahead in opinion polls – which show them on around 30% of voting intentions – but the two main right-of-centre parties together poll at more than 30%. In Spain’s most populous region of Andalucía they unseated the socialists last year with the help of the far-right party Vox.

Back in the City, the FTSE 100 is closing in on a new four-month high.

The blue-chip index is now up 50 points at 7184, only a few points away from last week’s peak.

Top risers include packaging firm DS Smith (+4.6%), mining group Antofagasta (+3%) and jet engine maker Rolls-Royce (+2.8%) .

This chart, from the inflation report, shows how the energy price cap kicked in, pulling the cost of living down;

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund, fears a disorderly Brexit would send inflation soaring again:

He says:

“With the UK mired in a major political crisis, we are still conscious that a ‘crash out’ Brexit would deliver a short-term inflation shock.”

That shock could include a tumbling currency, making imports pricier, and problems at the ports - creating supply shortages. That’s a recipe for higher prices.

Nice emoji work here

The slump in eurozone factory output shows European manufacturers are being hit by a swath of problems - at home and abroad.

Bert Colijn of ING (who may have been enjoying a recent BBC hit drama) explains:

The eurozone industrial sector is plagued with more drama than an average episode of The Bodyguard. Trade wars, emission standard related production delays, yellow vest movements and slowdowns in emerging markets have all played a part in the weakening of production over recent months, causing two quarters of declining production.

While the headline figure was much worse than anticipated, durable goods production increased in December and intermediate goods production was flat after a sharp decline in November. Out of the large economies, both Germany and France saw production increase, while Spain, Italy and the Netherlands contributed to the decline.

The rollercoaster ride for industry is far from over as deadlines on the China-US trade dispute and Brexit are coming closer.

Here’s my colleague Richard Partington on the drop in UK inflation:

One month’s decent inflation figures doesn’t make up for 10 years of austerity....

Good news for cash-conscious families: Stephen Clarke of Resolution Foundation thinks inflation will keep falling:

Yikes! Eurozone factories have just suffered their worst month since the financial crisis.

Industrial production across the eurozone shrank by 0.9% in December, new figures show. That means output was a shocking 4.2% lower than a year before.

This will reinforce fears that the eurozone economy is weakening, and could face a tough 2019.

These UK inflation figure are a real boost to household incomes.

They could help people save a bit more, says Kate Smith, Head of Pensions at Aegon:

“Inflation fell for the third month in a row to 1.8% in January, the lowest level since January 2017, bringing the 12-month rate finally below the Bank of England’s target of 2%. With the latest wage growth figures showing a positive trend, the gap between earnings and inflation continues to widen and households will feel an ease in the cost of living. In the period of real wage growth, individuals should find themselves in a strong financial position to set out financial goals and those who can afford to save any additional income should be encouraged to do so.

Taking a glass-half-empty approach, weak inflation can also be a sign that economic activity is cooling.

Nancy Curtin, chief investment officer of Close Brothers Asset Management, explains:

“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.”

Irony of the day: January’s inflation report shows that the energy price cap helped UK households... just a week after regulators agreed to LIFT the cap because wholesale prices have risen.

Falling inflation means that real wages are rising.

Average basic pay in the UK rose by 3.3% per year in the quarter to November (the most recent data available). So if inflation is just 1.8%, that means real earnings are growing by roughly 1.5% per year.

Here’s the Office for National Statistics’ explanation for how cheaper energy has pulled inflation down over the last year

The largest downward contribution to the change in the CPIH 12-month rate came from housing and household services, where gas and electricity prices fell, between December 2018 and January 2019, by 8.5% and 4.9%, respectively.

The downward movement partially reflected the response from energy providers to Ofgem’s January energy price cap which came into effect from 1 January 2019.

Clothing and footwear price have fallen over the last 12 months, today’s inflation report shows.

That’s a sign that struggling retailers have been slashing prices in an effort to lure shoppers.

As you can see, food, alcohol, housing and transport all became more expensive other the last year - but by less than in the previous 12 months.

UK furniture and homeware group Dunelm is also getting ready for Brexit.

It told the City this morning that it has been stockpiling some popular items, in case of a no-deal crisis.

The business imports less than 1% of its goods from EU countries. However, we have identified some risks arising from potential disruption at ‘deep-sea’ ports in the period following exit.

Actions have been taken within the business and throughout our supply chain to mitigate these risks, such as purchasing incremental stock of some best-selling lines and securing additional supply chain capacity.

Dunelm (like Galliford Try earlier) is also hedged against a sudden plunge in the value of the pound.

Sensible precautions, but Russ Mould, investment director at AJ Bell, fears they will eat into profitability.

European stock markets are all showing gains, following president’s Trump’s hint that he might give China more time to reach a trade deal.

• UK FTSE 100: up 33 points or nearly 0.5% at 7,166
  
• Germany’s DAX: up 55 points or 0.5% at 11,181
  
• French CAC: up 17 points or 0.35% at 5,074
  

UK housebuilder Galliford Try has added its voice to the chorus urging MPs to avoid a no-deal Brexit.

In its latest financial results, the company says crashing out of the EU would badly hurt the economy:

We consider that a controlled departure under the terms of a withdrawal agreement between the UK and the EU will have no significant direct impact, with supply chains and EU and other overseas labour able to adjust over time as detailed future arrangements become clear.

If the UK leaves without a deal, the biggest impact we foresee is the effect on our markets, and on Linden Homes market in particular, of a potential severe decline in consumer confidence and economic activity in general

Galliford Try adds that it has taken steps to protect its business against shortages of critical materials and products, but it’s “impractical to try to insulate our business entirely”.

Britain’s FTSE 100 has opened 25 points higher at 7,157.

That takes it closer to last week’s four-month high.

Paul Donovan of UBS Wealth Management says hopes of a US-China trade deal are bubbling, especially following Donald Trump’s comments.

Equity market investors can practically taste the beautiful piece of chocolate cake served on a Mar a Lago plate.

Enthusiasm about the prospect of a US-China trade deal led equities to rally. The hope is that not only will there be no new taxes, but some of the existing taxes may be reversed.

Sterling is bobbing around the $1.29 mark against the US dollar this morning, roughly where it ended yesterday. Today’s inflation data could move the currency pair, though.