Inflation dropped to a four year low of 1.6% in March, lowering the financial demands on low income householdís who have been subjected to soaring living costs in the past few years despite the growth in wages remaining relatively stagnant.
A recent fall in petrol costs was the primary factor attributed to the fall in inflation to 1.6% in March from the 1.7% figure in February as represented on the consumer price index, according to the Office for National Statistics. The current rate represents the lowest it has been since October 2009, and is substantially lower than the Bank of Englandís previous target for CPI of 2%.
And the news will be welcomed by low and middle income households across the UK, with it being widely expected that official confirmation of the rate in wage growth outstripping inflation for the first time in 5 years will be released tomorrow. This will mean that workerís will experience their first ever pay rise in real terms since the coalition ascended to power back in 2010, and will help bolster the countryís lowest earners spending power after years of seeing it reduced due to inflation outstripping wage growth.
The ONS also highlighted that the gap between the rate of inflation and the rate of wage growth is now at its lowest value since April 2010, with the previous occasion in which this occurred back in the middle of 2008.
Chancellor George Osborne has capitalised on the statistics, arguing that the figures on inflation combined with the reality that wage growth is beginning to surpass it is a clear evidence that the government has succeeded with its policies to improve and turn around the economy.
“These latest inflation numbers are welcome news for families. Lower inflation and rising job numbers show our long term plan is working, and bringing greater economic security. But there is still much more we need to do to build the resilient economy I spoke of at the budget,” he said in a statement made today.
ëOut of touch governmentí
However, despite the overwhelmingly positive nature of the statistics, Labour have remained unconvinced by the effectiveness of the governmentís economic policies, arguing that millions of workers across the country are yet to feel the effects of the economic recovery, suggesting a broken link between standards of living and economic performance.
Shadow Chancellor, Ed Balls, argued that despite the governmentís rhetoric and analysis of the recent inflation and wage data, that nevertheless many workers will remain sceptical of their performance and will continue to regard them as ëout of touchí.
“Because for most families in Britain today such a declaration, on the back of a handful of economic statistics, will only confirm just how out of touch this government is,” he said.
Mr Balls argued that a huge level of households are still failing to cope with rising housing costs, which has been reinforced by official statistics unveiled this morning about the current level of house price inflation in the country.
The ONS revealed that house price inflation soared to its highest point in nearly four years, with statistics indicating that house prices increased by 9.1% in the year to February, which is marked rise from the 6.8% figure displayed the month before. More alarmingly, the equivocal figures on the movement in property prices in London indicated that they had risen by a monumental 17.7& in the year to February 2014, fuelling fears that a housing bubble could occur in the capital sometime in the near future.
Moreover, it is feared that unless wages pick up at a far greater rate than they are doing now, that many people will default on their mortgage payments and be forced to sell their house when interest rates rise and necessitate that higher monthly contributions are made by householdís, particularly those who pay their secured loan back on an interest only basis.
To raise, or not to raise?
Leading economists in the UK have identified that the reduction in the countryís inflation rate would be welcomed by the Bank of England, who have been under intense pressure to raise interest rates prematurely in order to check the rapidly booming property market and prevent people from acquiring any more cheap debt that could be problematic when rates do eventually rise in the future.
“Clearly below-target inflation facilitates the Bank of England keeping interest rates down at 0.5% where we believe they are highly likely to stay through 2014 and during the early months of 2015 despite the economy’s improved growth and markedly reduced unemployment,” said Howard Archer, economist at IHS Global Insight.
“While encouraged by the economy’s recent stronger performance, the Bank of England is still not taking sustained recovery for granted and very much wants to see growth become more balanced.”
However, the news of the fall in inflation has not been welcomed by all economists, with Rob Wood, economist at German bank Berenberg commented: “Below target inflation does not give the BoE room to keep interest rates at rock bottom levels. Inflation a little below target means interest rates a little below neutral, not at record lows. Rock bottom interest rates are a response to an economic calamity and a serious risk of deflation, not the period of above trend growth that the UK seems likely to experience over the next couple of years.”
“In any case, it is the inflation outlook that really matters. There is every chance inflation will pick up as economic slack is eroded.”