Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 

Depending on whether you commute or not, it may not feel much like it – but the UK’s rate of inflation is edging lower. Indeed, it’s now well below the Bank of England’s central 2% target rate.

In December, inflation (as measured by the consumer prices index, CPI) came in at 1.3%, compared to 1.5% in November. Under the Bank’s previous target measure – RPIX, or the retail prices index excluding mortgage interest – inflation came in at 2.2%, down from 2.3% in November. (The old target was 2.5% – for more on the difference between the two, here’s an explainer).

That was a bit lower than expected. It gives more credence to the idea that the Bank might consider cutting interest rates from their already spectacularly low level of 0.75%. That in turn helped to weaken the pound in the wake of the report.

The good news is that this means that wages are still increasing in real terms (i.e. after inflation). The latest data (from October) suggests that wages (excluding bonuses) rose by 3.5% year on year. That means real wages are rising at a pretty decent rate, certainly compared to recent history. That should support consumer spending, which is a key part of the UK economy.

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