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UK inflation falls to 12-year low

Bigger than expected fall to 1% offers respite for hard-up Britons as plunging oil price feeds into cheaper petrol

UK inflation fell to its lowest level in 12 years in November as a sharp drop in oil prices triggered falls at the petrol pump and provided some relief for cash-strapped British households.

The annual rate fell to 1% – half the Bank of England’s 2% target – from 1.2% in October, according to the Office for National Statistics. It was the lowest level since September 2002.

The fall was bigger than had been expected in the City, where most economists had been forecasting a drop to around 1.2%.

The ONS said petrol prices, the cost of air travel and second-hand car prices were behind slowing inflation last month. Falling prices of “recreational and cultural” goods, such as printers, computer games, toys and hobbies, were also drivers.

Paul Hollingsworth, UK economist at Capital Economics, said inflation would fall further in the months ahead amid low oil prices – which have tumbled 25% to below $60 a barrel – frozen energy bills and a weak inflationary backdrop.

He said: “While we think that outright deflation will be avoided, it is clear that inflation is set to fall significantly below 1% over the coming months.”

Mark Carney, the Bank of England’s governor, narrowly avoided having to write a letter to the chancellor explaining why inflation is so low. The governor is required to write a letter of explanation when inflation is more than one percentage point adrift of the target.

The Bank’s Monetary Policy Committee (MPC) said in its November inflation report that inflation is likely to fall below 1% in early 2015.

The drop signals some respite for UK households, which have suffered from falling real pay every year since 2008 as inflation outpaced wage growth.

Policymakers are hoping that real wage growth will start to rise consistently in 2015 as inflation remains low and pay growth starts to pick up. In the latest available ONS data for July to September, pay including bonuses grew 1% compared with a year earlier. Excluding bonuses the rate was 1.3%.

Danny Alexander, the Liberal Democrat chief secretary to the Treasury, described the fall in inflation as an “early Christmas present” for millions of families.

He added: “I am determined that the continuing oil price falls will be passed on to consumers as quickly as possible and in full.”

Plunging commodity prices and weak wage growth against a sluggish backdrop for global growth prompted the MPC to lower its forecasts for inflation in November. Low inflation has been one of the factors supporting the MPC’s decision to leave interest rates on hold at 0.5%.

James Knightley, economist at ING, said: “We had been thinking that the Bank may hike soon after the general election in May, but given the lack of inflation pressures a third-quarter move is more probable.”

The Guardian
Published on:
December 16, 2014
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