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Inflation reaches Bank target for first time in five years

POSTED: 3rd February 2014
IN: General
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Inflation has fallen to the Bank of England’s target of 2.0 per cent for the first time in more than four years.

Inflation has fallen to the Bank of England’s target of 2.0 per cent for the first time in more than four years.

The Office for National Statistics (ONS) reports that the consumer prices index (CPI) measure of inflation has fallen from 2.1 per cent in November to 2.0 per cent in December.

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The biggest factor contributing to the fall in inflation was a drop in the cost of food and non-alcoholic beverages and recreational goods and services. This was partially offset by a rise in the cost of motor fuels.

The last time inflation was at or below the target was in November 2009 when CPI was 1.9 per cent. Inflation has fallen from 2.9 per cent in June to 2.0 per cent in just six months.

The news will be welcomed by consumers as well as the central bank and the government.
Households have seen an unprecedented squeeze on income in recent years as inflation outpaces earnings increases, reducing the value of the pound in their pockets and reducing real incomes.

The fact that inflation is at target and under relative control at the moment makes it easier for the Bank of England to justify keeping interest rates at a record low.

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “Near-target inflation facilitates the Bank of England keeping interest rates down at 0.50% where we believe they are highly likely to stay through 2014 despite current rapidly falling unemployment.”

However, even though the gap between pay rises and the cost of goods and services is narrowing, prices are still rising more than twice as fast as wages.

Mr Archer added: “Nevertheless, the squeeze on consumers’ purchasing power remains significant that inflation at 2.0% in December is still running at essentially double average annual earnings growth of 0.9% in the three months to October.

“While earnings growth seems likely to pick up over the coming months, the increase will most probably be gradual so it could well take to mid-2014 before earnings growth finally overtakes CPI.”

The rate of CPI inflation in the final quarter of 2013 was just 2.1 per cent. The rate over the course of 2013 averaged 2.6 per cent, the lowest since 2009 and down from 2.8 per cent in 2012 and 4.5 per cent in 2011.

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