Inflation set to fall below 1%

Published: Tuesday 13th January 2015 by The News Editor

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Inflation is expected to have dipped below 1% in December when official figures are published today, triggering a letter of explanation from Bank of England governor Mark Carney to Chancellor George Osborne.

The Consumer Price Index (CPI) measure of inflation looks set to plunge further from the previous month’s 12-year low with some economists expecting it to match a 0.5% record set in May 2000.

It will prompt the first letter that Mr Carney will have had to write to the Chancellor to explain why CPI is more than 1% off its 2% target – and what action policy makers are planning to address it.

The Bank of England has already said it expects inflation to fall below 1% and remain there for months to come. The low level means there seems little reason for policy makers to hike interest rates.

It is being dragged lower by sliding oil prices, and this month’s figure will also be pulled down by the effect of household energy tariffs – unchanged in December, compared to the same month a year before when they were hiked sharply.

A fall in the rise of the cost of living eases pressures on household budgets and adds to hopes of a sustained increase in real terms pay, with most recent wage rise figures at an above-inflation 1.4%. Latest pay data is published next week.

But an inflation rate below 1% threatens to bring the UK uncomfortably closer to the scenario playing out in the eurozone where there are fears of a damaging deflationary spiral after inflation fell to minus 0.2%.

CPI dropped to 1% in November and has been below the 2% target since the start of 2014, with the key factors being falling motor fuel and food prices – the latter sparked by the fierce competition gripping the supermarket sector.

Inflation by this measure was last lower than 1% in June 2002, at 0.6%. Its lowest level since records began in 1989 was in May 2000 when it hit 0.5%.

Some economists expect CPI for last month to have fallen as low as this but others expect a higher reading of up to about 0.8%.

Scotiabank’s Alan Clarke cited key factors for the fall including petrol price and utility bills – with an increase in the latter adding 0.3% to the inflation rate for the same month last year which will fall out this time as tariffs have been left unchanged.

He said the effects of Black Friday discounting at the end of November would also be recorded in last month’s figures. However industry data suggested food price cuts may have eased off, he added.

Mr Clarke said CPI was likely to remain close to 0.5% until the middle of the year before pushing back closer to the 2% target in early 2016.

Paul Hollingsworth, of Capital Economics, said inflation looked likely to fall to 0.2% in February as the effect of falling oil prices continue to feed through and that even a brief period of deflation could not be ruled out.

Published: Tuesday 13th January 2015 by The News Editor

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