British inflation plunged to its lowest level since May 2000 last month and Bank of England Governor Mark Carney said it looked set
to fall further.
Official figures yesterday showed the annual rate of consumer price inflation halved to 0.5% in December from 1.0% in November.
The tumble reflected a slide in global oil prices. Coming four months before a national election, the government said it was good
news for consumers, boosting their spending power after years of weak wage growth.
It also may delay any rate rise from the BoE if price falls spread beyond food and energy.
Most economists say Britain, where consumer spending remains strong and wages are starting to rise, faces less danger of deflation
than the eurozone, where falling prices have sparked fears of a Japan-style economic stagnation.
Carney said that he expected inflation to drift lower in coming months, but then to return towards 2%.
“A little bit of inflation is good for the economy,” he told the BBC. “We have the means at the Bank of England and the will and
responsibility ... to bring inflation back up to the 2% target.”
Carney added that he still expected interest rates to rise in the foreseeable future, though increases may be slower than once
“It’s a question of the pace of those interest rate increases, and the degree. Relative to a year ago, it is probably a little more
gradual and a little more limited ... largely because of factors outside our shores.”
Crude oil prices fell to their lowest level in nearly six years yesterday, pointing to further falls in inflation.
In November, the BoE predicted CPI would reach its target of 2% only towards the end of 2017. Financial markets are expecting the
BoE to start raising rates only in early 2016.
Economists in a Reuters poll had expected inflation in December to fall to 0.7%. Sterling weakened after the data and was close its
lowest level against the dollar in 18 months.
Carney said the BoE would look closely at Britons’ inflation expectations, which at the moment show they think inflation will rise
fairly close to the BoE’s 2% target in coming years. Such expectations partially gauge whether consumers are minded to put off
spending hoping for cheaper prices.
After years of prices rising faster than wages, the inflation data may help the government of Prime Minister David Cameron to
combat criticism from the opposition Labour Party that it has presided over a “cost of living crisis”, one of the big political
themes ahead of a May 7 national election.
“This acts like a giant tax cut for the economy, putting more money in the pockets of hard pressed-consumers,” said Danny
Alexander, the deputy finance minister.
Economists flagged the possibility that British inflation could turn negative soon if oil prices — which have already fallen 60%
from their June 2014 peaks — fall further.
“But we reject any notion that the UK faces serious risk of harmful deflation,” said Michael Saunders, economist at Citi.
The Office for National Statistics said falling petrol prices and lower electricity and gas bills compared with a year ago were the
biggest factors pushing down inflation in December.
Food prices, which have been pushed down by a supermarket price war and lower commodity prices, fell 1.9% — their biggest fall
since June 2002.
The ONS said prices at the factory gate fell 0.8% in the year to December, the biggest decline since September 2009 and a steeper
fall than forecast by economists.
Britain’s measure of consumer price inflation, like that in the euro zone, does not include house prices, which the ONS said on
Friday were up 10% in the year to November.
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