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

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).

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/economy/uk-economy/601079/how-the-coronavirus-pandemic-is-killing-cash
UK Economy

How the coronavirus pandemic is killing cash

Covid-19 is making a huge difference to the way we live, work and do business. One of its less obvious effects, says Merryn Somerset Webb, is to accel…
31 Mar 2020

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/small-business/601073/furlough-what-does-it-mean-and-how-does-it-affect-me
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020
Visit/investments/stockmarkets/601068/buy-stocks-for-the-long-term-but-buy-very-carefully
Stockmarkets

Buy stocks for the long term, but buy very carefully

After the wild ride of the last couple of weeks, equities are no longer expensive. But if you do decide to buy, be very, very careful indeed, says Mer…
30 Mar 2020