Inflation in the UK, as measured by the Consumer Prices Index (CPI), has fallen below the Bank of Englandís previous target of 2%, falling to 1.9% in January this year.
The CPI, which measures the movements in cost of household consumer goods and services, found that inflation fell by 0.1% in January compared to the month before; marking the first occasion that inflation has fallen below the Bank of Englandís target of 2% since November 2009.
The Office for National Statistics has argued that a sharp fall in the costs of DVDís and the multitude of vouchers and discounts that have been available to consumers for tourist attractions since the start of this year have had the most significant impact on bringing the overall inflation rate down.
However, the ONS downplayed the impact that the governmentís recent ërolling backí of green levies had on the inflation rate, arguing that only British Gas instigated a reduction on its previous price hike last month, which totalled 3.2%. However, this was counterbalanced by E.ON and EDF implementing their reduced price hikes in the same month by 3%, which has meant that energy prices have not contributed to the fall in inflation across the UK.
The news will be welcomed by the Bank of England, who has been under intense pressure to raise interest rates, following the initial phase of forward guidance nearing completion.
However, inflation falling below its previous target of 2% will reinforce the banks previous claims that a rate rise is unwise and unnecessary, as the current financial complexion of the UK is far more hospitable for UK consumers when planning their finances moving forward in the future
ëVery good newsí
The news of Britainís inflation rate falling to a four year low has been welcomed by a number of the countryís leading economists, who have argued that for the time being, it is creating an environment where consumer spending power is enhanced twofold from low interest rates and low inflation.
ìThe fall in inflation is very good news for businesses and consumers, and will strengthen the case for the Bank of Englandís revised forward guidance policy that an early rise in interest rates is neither necessary nor likely,” said David Kern, chief economist at the British Chambers of Commerce.
“An economic environment of low inflation and low interest rates allows people and firms to plan ahead; as they can be confident they will not encounter any unwelcome surprises.”
However, the Bank of England have warned consumers that although the news of a fall in inflation is entirely positive, that they should nevertheless proceed with caution when taking out new loans and take into account that interest rates will rise sooner rather than later.
David Miles, member on the Bank of Englandís Monetary Policy Committee, said: “It is important that there is a clear recognition by borrowers and lenders that interest rates will not remain at this level for many years to come,î he said.
ìThey need to think very carefully whatís going to happen when the cost of that mortgage moves up.î
Most economists have forecasted rates to steadily begin creeping up in the first half of 2015, and have mirrored Mr Miles stance and urged people to test their current finances against potentially higher repayments in the future before taking out any significant loans at low rates at present.
However, the Bank of England did announce last week that they had changed the nature of their forward guidance policy so that it no longer attached the future of interest rates to unemployment, and instead identified their intention to consider a multitude of factors such as wage improvements, consumer spending and business levels before deciding to implement a rise.
This should mean that consumers are not hit by sudden and sharp rises, and should quell doubts that any radical shift in personal finances is due anytime soon.
“The current inflation reading will give some confidence to the Bank that inflation will remain below target for the time being, particularly given the fall in the core rate, and will help reinforce the new fuzzy form of guidance for now,” said Colin Bermingham, an economist at BNP Paribas.