Game-changer: UK inflation just sank even lower than anyone predicted

UK consumer price inflation slid to 0.5% in December, equalling its lowest ever level. Mischa Frankl-Duval explains what that means.

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150113-UK-inflation

UK inflationhas fallen tojust 0.5% that means interest rates may not rise this year

What happened?

CPI 12-month inflation rate for the last ten years

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Source: Office for National Statistics

Sterling was trading at a low of $1.5083 following the announcement, down from $1.5119 immediately before it. The yield on five-year gilts also fell, to below 1%.

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The figures released this morning by the Office for National Statistics (ONS) fell well short of the government's official target of 2%, though George Osborne did his best to put a positive spin on the results:

"Inflation is 0.5% - lowest level in modern times", the Chancellor tweeted. "Welcome news with family budgets going further & economic recovery starting to be widely felt."

150113-osborne-tweet

So what does this mean?

said the Guardian

1: Earnings are rising faster than prices, so real wages are growing.

2: There's less chance of the Bank of England raising interest rates this year.

What's next?

said Bloomberg

"Most economists expect inflation to continue to fall over the next few months, with oil prices at a near six-year low amid concerns of a bigger oil surplus in coming months." said the Financial Times.

"The rapid fall in crude prices is likely to deliver a spending boost to hard-pressed consumers."

What should I do right now?

Mischa Frankl-Duval

Mischa graduated from New College, Oxford in 2014 with a BA in English Language and Literature. He joined MoneyWeek as an editor in 2014, and has worked on many of MoneyWeek’s financial newsletters. He also writes for MoneyWeek magazine and MoneyWeek.com.

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