In the wake of falling oil prices, CPI growth in the UK has dropped to 1%, potentially further delaying a rise in interest rates, according to the Office of National Statistics (ONS).
Inflation as measured according to the Consumer Price Index (CPI) fell from 1.3% in October to 1% in November. This is the measure of the rise of the cost of household goods for consumers calculated over a 12 month period. So what this means is that between November 2013 and 2014, the cost of a market basket of consumer goods has risen by 1%, slowing down significantly to a rate not seen since 2002. This has far exceeded the predictions of economists, who thought that the rate would only drop to 1.2% from October to November. The core inflation rate, and retail-price inflation both also fell by 0.3%, to 1.2% and 2% respectively.
The slowed growth in CPI is largely down to a drop in food prices and transport costs. The latter of course relates directly to a sharp drop in oil prices which has affected countries globally: Brent crude oil prices dropped to $60 a barrel, down from highs on $115 reached in June of this year. Oil prices generally have fallen to a five-year low (leading motor fuel costs drop by 5.9%), something Mark Carney has announced as an ëunambiguously net positive for the UK economyí.
Reductions in costs in the following categories have all contributed to slowed growth in CPI, according to the Office for National Statistics:
- Food and non-alcoholic beverages,
- Alcohol and tobacco,
- Recreation and culture,
- Restaurants and hotels, and
- Miscellaneous good and services
All of this means that wages are finally now rising faster than prices of consumer goods, which is a positive trend compared to what weíve seen in previous months.
The drop in inflation has been hailed as great news for British consumers by Martin Beck of the EY ITEM club (an economic forecasting committee) but could cause a dilemma for the Bank of Englandís Monetary Policy Committee (the committee responsible for deciding the national interest rates).
ìWe expect to see a steady pickup in wage growth and further declines in unemploymentî he said, ìwhich would normally lead the MPC to act, particularly given that the falling oil price is likely to boost growth. But it is questionable whether the MPC would want to authorise a first rate hike in 8 years at a time when the CPI measure is below 1%î
Previous warnings from the BCC about dangers of increased interest rates can now be put on the back burner since decreased inflationary pressures mean that interest rates are unlikely to rise until at least the final quarter of 2015.
If inflation drops below 1% (which would mark a 1% difference from the Bank of Englandís target of 2%) then Mark Carney will have to write a letter of explanation to George Osborne. However this is not likely to be as worrying as it seems, as with falling oil prices (and the rest), the explanation is likely to be fairly straightforward.
There is a slight worry that if inflation continues to fall at this rate, the UK may be joining the rest of the Eurozone in a battle against a deflationary spiral, but despite the potential economic instability in the coming months and years, this reduction in inflation is still being praised as an ìearly Christmas present for consumersî by Treasury Chief Secretary Danny Alexander.