CPI hits the government’s target for the first time since November 2009

14th January 2014

The Consumer Prices Index (CPI) grew by 2.0% in the year to December 2013, down from 2.1%. in November according to the Office for National Statistics. This is the first time inflation has hit the Government target since November 2009. The largest contributions to the fall in the rate came from prices for food and non-alcoholic beverages and recreational goods & services, partially offset by an upward contribution from motor fuels.

The ONS says that transport contributing most to inflation.  Prices, overall rose at a quicker rate between November and December 2013 than

between the same two months in 2012. The majority of the upward contribution came from prices for petrol & diesel. Petrol prices rose by 0.5 pence per litre between November and December 2013 compared with a fall of 2.8 pence per litre between the same two months in 2012, to stand at 130.4 pence. Diesel prices rose by 0.8 pence per litre between November and December 2013 compared with a fall of 1.4 pence per litre between the same two months in 2013, to stand at 138.3 pence.

The upward contribution was partially offset by air fares where prices increased between November and December 2013 as usual, but at a slower rate than in 2012.

The first tranche of the expected winter price increases for gas and electricity entered the index this month.

Jody Sturman, a financial adviser at Moneysprite, says:  “Pensioners, investors, savers and shoppers will breathe a sigh of relief that inflation is now back on target.
For a number of years, high inflation and low interest rates have piled considerable misery on many household finances — especially pensioners and savers who rely on cash deposits to provide them with capital growth.
“Pensioners, in particular, have been on the frontline of inflation so for them this will be especially welcome news. We have come across many people who have taken on more risk than they are comfortable with in order to keep their returns real, and so the news that inflation has fallen again may enable them to readjust their risk exposure.
“With the economy improving it’s now all about when rates will rise. Cash savers and pensioners have been decimated by the low interest rates available on deposit. For them, if not for mortgage holders, rate rises cannot come too soon.”

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 Currency view

Chris Towner, director of FX advisory services at HiFX says: “The members of the monetary policy committee will have a smile on their face as inflation is running right on their target 2% target rate for the first time since November 2009. This not too hot, not too cold scenario is the perfect pitch for inflation as the members feel that at 2% there is a void of both inflationary concerns as well as deflationary concerns. In Europe the inflation rate is running at 0.8%, which is too low for the ECB members and therefore they were forced to cut rates at the end of last year.

“What a 2% inflation rate allows the Bank of England is breathing space and they can continue to wait and see and monitor the unemployment rate. If unemployment drops from its current 7.4% level to 7%, while inflation sticks at 2% and the PMI surveys continue to point to solid growth, then this will allow the Bank of England to start to manage expectations for a rate hike. For now though, things are very settled with no need for action and this can be expected for at least 12 months.

“Sterling is slightly off on the back of this news for two reasons. Firstly the trend for inflation looks to be lower and therefore with declining inflationary pressures there is no need for the Bank of England to raise rates. Secondly with the European inflation rate at 0.8%, perhaps this trend could lead to fears of stagflation.”

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