Inflation drops to Bank of England's target

It is the sixth month in a row that the Consumer Prices Index (CPI) rate has fallen, after reaching 2.9% in June. Inflation was last lower, at 1.9%, in November 2009 and since then had risen as high as 5.2%, in September 2011

The Bank of England

Inflation fell to the Bank of England’s 2% target for the first time in more than four years in December, easing pressure on policymakers to put up interest rates and loosening the squeeze on household finances.

It is the sixth month in a row that the Consumer Prices Index (CPI) rate has fallen, after reaching 2.9% in June. Inflation was last lower, at 1.9%, in November 2009 and since then had risen as high as 5.2%, in September 2011.

Economists expect it will continue to fall during 2014, leaving it on course to be overtaken by wage growth, which has been lagging behind the rise in the cost of living.

The continued decline has helped Bank of England governor Mark Carney enjoy a benign spell during his first six months since taking office in July.

Low inflation saves the Bank’s policymakers from being forcedto consider raising interest ratesfrom their historic low of 0.5%.

An easing-off in household budget pressures also represents a political bonus for the coalition. Prime Minister David Cameron tweeted: “It’s welcome news that inflation is down and on target.”

Labour’s Treasury spokeswoman Catherine McKinnell welcomed the fall but said: “With prices still rising more than twice as fast as wages, the cost-of-living crisis continues.”

 

The most recent figures showed wages were increasing by just 0.9% a year - meaning they continued to fall in real terms - but it is hoped that a strengthening labour market will see pay rises finally overtake inflation.

Analysts at Capital Economics now forecast CPI easing gradually to 1.5% by the end of the year. Yesterday’s inflation figure from the Office for National Statistics beat expectations for a small rise from November’s 2.1% figure, which was already at a four-year low.

Some of the steep increases in gas and electricity tariffs expected to push the rate up did have an upward impact, though not all of them had taken effect by the time data was collected.

These were offset by a slowdown in the rise in the cost of food and non-alcoholic beverages to 1.9%, its lowest level since May 2010, with the main downward contribution coming from fruit and meat.

Games, toys and hobbies also saw price falls as Christmas approached, with reductions in computer games made for older platforms.

Rising petrol prices had an upward effect on inflation, but the increase in the rate of air fares was lower than in 2012.

James Knightley, of ING Bank, said that with producer price pressures easing, and the strong pound making imports cheaper, there was growing optimism of the low inflation trend continuing.

“With the labour market strengthening, we will hopefully see wages start to pick up to the extent that incomes are rising faster than the cost of living.

“This would ease the squeeze on household finances and allow consumer spending to continue growing strongly.”

Howard Archer of IHS Global Insight added: “It could well take to mid-2014 before earnings growth finally overtakes consumer price inflation.”

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