Cost of living rise to hit new low

Published: Tuesday 17th February 2015 by The News Editor

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The rise in the cost of living is expected to have fallen to its lowest rate on record when inflation figures for January are published today.

The Consumer Price Index (CPI) measure of inflation fell to its equal lowest ever level of 0.5% in December and economists expect it to have dropped to 0.3% at the start of this year.

Bank of England forecasts suggest it will turn negative over the next few months. CPI has been driven lower by sliding oil prices and the supermarket price war and could be lowered further in coming months with the impact of energy tariff cuts.

The current period of low inflation is seen as positive as it boosts household spending power, which also looks set to be helped by improving wage growth – cheering voters ahead of the general election and bolstering the wider economy.

But policy makers want to avoid plunging into a sustained spiral of falling prices, putting consumers off purchases and deterring businesses from investment.

Bank of England governor Mark Carney said last week that interest rates could be cut further from 0.5% should low inflation persist, though the Bank’s projections over the next couple of years suggest it will start climbing by the end of 2015.

Latest inflation figures come during a key week for economic data with employment and wage numbers out on Wednesday and public sector finances – giving a key update on efforts to bring down the deficit – on Friday.

CPI numbers going back to 1989 show it last falling as low as 0.5% in May 2000. An experimental model created by the ONS last year estimated the last time that it was negative was in March 1960.

Inflation forecasts by economists for January this year vary with some pencilling a higher figure than others at 0.4% or 0.5%.

Scotiabank’s Alan Clarke said though petrol prices and food would continue to drag it down, clothing would have a positive effect on CPI with the start of the year seeing less discounting than usual – as there had already been reductions before Christmas.

Petrol prices have dropped in recent months as the price of a barrel of Brent crude has fallen by more than half to below 50 US dollars in January – though in recent days it has rebounded to over 60 US dollars.

Pay data out later this week is expected to show wages once again growing ahead of inflation, pointing to the first sustained improvement in real-terms pay since 2008.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The Government will be hoping that very low inflation and improving earnings growth improves its popularity in the run-up to May’s general election.”

Further key pre-election data in the public sector finance figures this week are expected to show a boost from self-assessment tax receipts.

Vicky Redwood, of Capital Economics, said these were “make or break” for Chancellor George Osborne.

“He is banking on a bumper crop of self assessment receipts to get the downward trend in borrowing back on track.”

Published: Tuesday 17th February 2015 by The News Editor

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