Inflation slumps to a four-year low

Britain’s headline annual inflation rate fell to 1.7% last month, from 1.9%. That’s the lowest that consumer price index (CPI) inflation has been since October 2009. The drop was largely due to firms passing on lower commodity prices. CPI has now fallen by a whole percentage point in six months.

Asset price inflation hasn’t stopped though. The average house price rose to £254,000 in January, according to the Office for National Statistics, up 6.8% year-on-year, the fastest annual growth since August 2010.

London prices are up 13.25% on the year, with a 53% jump in mortgage lending compared to last year underpinning prices. Meanwhile, a survey of the retail sector by the Confederation of British Industry pointed to a slight decline in activity in March, from February’s two-year high.

What the commentators said

Inflation seems likely to fall further in the coming months, according to City forecasters. RBS is pencilling in a 1.5% rate by March and expects CPI to remain below the Bank of England’s 2% target for the rest of 2014.

The supermarket price war, lower commodity prices and lower prices from energy firms all bode well for now, agreed The Daily Telegraph. But our inflation rate is still the highest in the G7, and “there is a growing risk that it could rise sharply in the coming years”.

A key driver of inflation is the amount of spare capacity in the economy, which is a gauge of how much GDP can grow without pushing up inflation. Spare capacity is notoriously hard to measure, but it’s worth noting that one member of the Bank of England’s Monetary Policy Committee reckons it’s down to 0.9% of GDP, compared to the Bank’s official estimate of 1.5%. So it may not be too long before demand in the economy begins to outstrip capacity (supply), thus triggering inflation.

For now though, people will be relieved that easing price pressures “will become increasingly noticeable in their pockets…as pay growth finally catches up with inflation”, as Katie Allen pointed out in The Guardian. Average annual pay growth is running at 1.4%.

And surveys indicate that companies are now inclined to “finally start passing on some of their recovering fortunes to workers”. Along with further increases in employment and house prices, this will underpin consumption, fuelling the recovery.

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