Inflation falls below Bank of England's 2% target for first time in four years

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Britain’s squeezed households have been offered some welcome respite after inflation fell below the Bank of England’s 2% target for the first time in more than four years.

The Consumer Prices Index (CPI) dipped to 1.9% in January from 2% in December, prompting experts to herald the start of a long run of below-target inflation in what will help ease the burden on stretched family finances.

January’s fall in inflation also boosts the Bank of England’s case for keeping interest rates at record lows of 0.5%.

 

Economists forecast that inflation will remain under the 2% target throughout 2014, raising hopes that wage growth will finally overtake rises in the cost of living.

Wage increases remained less than half the rate of inflation, at just 0.9%, in the last set of official figures for the three months to November.

But it is thought that rises in earnings and falling inflation will see real wages increase this year, giving consumers some much-needed spending power.

The drop in inflation marks the first time CPI has fallen below the Bank’s 2% target since November 2009.

It comes after inflation fell to the threshold in December, ending a lengthy period of stubbornly high inflation.

Britain is now said to be facing a golden age of strong economic growth and low inflation - dubbed the Goldilocks scenario by one economist.

Inflation since 1989

 

The Bank of England last week delivered a sharp upgrade to its growth outlook for 2014, to 3.4% from 2.8%.

But slack in the economy and falling inflation has given it breathing space to keep rates at ultra-low levels.

The Bank extended its pledge to keep rates at historic lows, despite abandoning its guidance linked to unemployment as a result of sharp improvements in UK joblessness.

It replaced the old guidance with policy based on a more complex framework linking rates to the output gap in the economy as measured by a series of 18 indicators - dubbed “fuzzy guidance”.

Prime Minister David Cameron said in a message on Twitter: “Today’s fall in inflation is more evidence our long-term economic plan is working. We want to ensure a secure future for hard-working people.”

Inflation has now fallen for seven months in a row and was last lower in October 2009 when it hit 1.5%.

Since then, Britons have endured soaring costs with inflation reaching a recent peak of 5.2% in September 2011.

Samuel Tombs at consultancy Capital Economics said there was a good chance inflation would fall as low as 1% by the end of this year.

“This should enable real earnings to rise for the first year since 2007 and allow the Monetary Policy Committee to keep interest rates on hold until well into next year,” he said.

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