UK inflation falls to 12-year low

Plunging oil prices are starting to feed through to UK consumers’ pockets after inflation fell to just 1% for the first time in 12 years last month.

The consumer price index is now half the Bank of England’s 2% target, largely because the slide in the oil price is being reflected at the UK’s petrol pumps. The last time annual inflation was as low as 1% was September 2002, and it is expected to fall further in the new year to below 1%.

Danny Alexander, the Liberal Democrat chief secretary to the Treasury, described the fall in inflation as an “early Christmas present” for millions of families.

November’s fall was bigger than the City expected, with economists forecasting a drop to 1.2% from 1.3% in October.

Mark Carney, the Bank of England governor, said lower oil prices – down 40% since June – were largely positive for consumers and should support economic growth in the UK. He said: “We should be clear that the 40%-plus drop will flow quickly through to consumers and increase real disposable income and is a net positive for the UK economy.”

Average petrol prices were 3p a litre lower in November than in October, compared with a 1.7p fall over the same period last year. Diesel prices fell by 2.9p per litre over the month, following a 1.5p fall a year earlier.

Lower air travel costs, food prices and second-hand car prices also contributed to slowing inflation last month, as well as falling prices of “recreational and cultural” goods such as printers, computer games and toys.

Paul Hollingsworth, UK economist at Capital Economics, said inflation would fall further in the months ahead because of low oil prices, frozen energy bills and a weak inflationary backdrop.

He said: “While we think that outright deflation will be avoided, it is clear that inflation is set to fall significantly below 1% over the coming months.”

Carney narrowly avoided having to write a letter to the chancellor explaining why inflation was so low. The governor is required to write a letter of explanation when inflation is more than one percentage point adrift of the target.

The Bank’s monetary policy committee (MPC) said in its November inflation report that rate was likely to fall below 1% in early 2015, prompting a letter.

The drop in inflation signals some respite for UK households, which have suffered from falling real pay every year since 2008 as inflation outpaced wage growth.

Policymakers are hoping that real wages will start to rise consistently in 2015 as inflation remains low and pay growth starts to pick up. In the latest official data for July to September, pay including bonuses grew 1% compared with a year earlier. Excluding bonuses the rate was 1.3%.

Low inflation has been one of the factors supporting the Bank of England’s decision to leave interest rates on hold at 0.5%.

Frances O’Grady, general secretary of the Trades Union Congress, said November’s fall in inflation should “put a decisive end to speculation about early interest rate rises”.

James Knightley, economist at ING, said: “We had been thinking that the Bank may hike soon after the general election in May but, given the lack of inflation pressures, a third-quarter move is more probable.”

The New Economics Foundation (NEF) thinktank said the sharp fall in inflation last month to 1% masked the differences across the income spectrum, with the poorest hit hardest by rising prices.

The NEF said inflation for the poorest 10% of earners in October was 1.25%, while the top 50% enjoyed a lower rate of 0.98%. It said the bias happened because poorer households tended to spend a bigger proportion of their income on essentials such as heating and electricity and had missed out on the falling prices of non-essential items such as recreational goods.

James Meadway, senior economist at the NEF, said: “For the poorest Britons, the standard of living crisis continues, as inflation – even at these low rates – is continuing to eat away at their earnings. And with the richer half of society seeing a return to higher income growth, it looks like inequality is once more on the increase.”

Powered by article was written by Angela Monaghan and Jill Treanor, for The Guardian on Tuesday 16th December 2014 18.55 Europe/London © Guardian News and Media Limited 2010


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