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. 

The Bank of England could lower rates even further
(Image credit: © 2016 Bloomberg Finance LP)

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.

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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.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.