Inflation falls and hits the Bank of England’s target

Britain’s official inflation rate has finally fallen to meet the Bank of England’s target level for the first time in four years. The consumer price index (CPI) inflation rate fell to 2% in December, with the fall mainly due to food prices rising more slowly.

Core inflation, which strips out food and energy prices, also eased to stand at 1.7%. However, the old measure of inflation, the retail prices index (RPI), ticked up from 2.6% to 2.7%.

What the commentators said

Bank of England governor Mark Carney “seems to possess all the luck of his Irish ancestry”, said Jeremy Warner in The Daily Telegraph. No sooner had he begun his tenure last summer than growth “came roaring back”. Now inflation “seems to be behaving itself again”.

CPI might even undershoot the target in the months ahead. Not that the Bank of England, which has kept interest rates at a 300-year-low since 2009, had anything to do with this, as Stephen Lewis of Monument Securities pointed out.

Disinflation (falling inflation) has been a global phenomenon. Recent falls in agricultural commodity prices have yet to feed through to food prices completely, while the recent rise in the pound is helping to keep a lid on import prices. Energy prices should also fall as providers pass on the government’s reductions in green taxes.

Lower inflation should finally start to reverse the squeeze on living standards, said Larry Elliott in The Guardian. Real (after-inflation) wages have fallen by almost 8% since the start of 2009. Now that price rises are easing and the labour market is tightening, they could finally start to rise. But there are plenty of reasons to believe inflation could make a comeback.

CPI, which doesn’t include housing costs and council tax, is in any case arguably a less accurate gauge of inflation than RPI, said Liam Halligan in The Sunday Telegraph. Since it’s almost always higher than CPI, unions use RPI as a basis for wage negotiations, for example.

Sterling could well slide again given the current account deficit. Note too that inflation has been sticky over the past four years despite Britain’s comparatively weak economy. “Now that demand is growing quickly… we could easily see further price pressures.”

Past quantitative easing, or money printing, is also likely to fuel inflation. Ed Miliband’s campaign on the cost of living, said Ian King in The Times, “may continue to resonate for a while”.

Merryn

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