Inflation slumps to a four-year low

published 27 March 2014

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

What the commentators said

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 pocketsas 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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.