16th December 2014
Inflation has fallen to a 12-year low of just 1% in November, official statistics reveal.
The Consumer Prices Index inflation measure fell from 1.3% in October, according to the Office for National Statistics.
The drop in consumer prices was largely due to lower petrol and food prices, which was great news for shoppers’ purchasing power.
If inflation falls below 1%, the Bank of England governor will have to write a letter to the chancellor explaining why it is below target..
Howard Archer, chief UK and European economist at IHS Global Insight, said that given the continuing supermarket price war and low import costs, consumer prices inflation looks set to dip below 1% in the near future.
He said: “With inflation looking poised to imminently dip below 1.0% and earnings growth seemingly finally trending gradually upwards, purchasing power should continue to improve over the coming months. This is key for sustainable decent consumer spending growth.
“The government will certainly be hoping that consumer purchasing power continues to improve through the early months of 2015 and this makes people feel better about life and more prepared to vote for them in May’s general election. ”
He forecasts that inflation will dip under 1% in December and stay there through the early months of 2015 before gradually edging up and averaging just 1.1% in 2015. In 2016 he believes it will average 1.7% before reaching 2% at the end of the year. to average 1.7%.
Archer said that deflation does not appear to be a serious risk in the UK – unlike in the Eurozone – the very real prospect that consumer price inflation will be below 1 for a while in 2015 and will likely be below its 2% target for a prolonged period could make the Bank of England increasingly wary about raising interest rates at all in 2015, even if growth holds up well.
Chris Williams, chief executive officer of Wealth Horizon, added: “This latest fall leaves the official inflation rate at its lowest level for more than a decade. While this bigger than expected fall is great news for savers, it also pushes back the prospect for any rise in interest rates.
“For investors waiting on the sidelines in cash this is a difficult time as they now face the prospect of earning virtually nothing on their savings for even longer.
“Anyone in cash should think about reviewing their holdings now, looking for investments which, over the longer term, can deliver much more than rates being offered by banks on deposit accounts.”