Inflation falls to record low – Experts share their views

13th January 2015

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Consumer price index inflation fell to a record low of 0.5% in December, down from 1% the previous month.

It is the joint-lowest figure on record and is largely the result of the plummeting oil price which meant that motor fuel costs plunged by 10.5%. Food costs dropped by 1.9%.

The governor of the Bank of England, Mark Carney, will now have to write a letter to the Chancellor explaining why inflation is below the target of 2%.

We round-up the experts’ views on rock bottom inflation and what it means for your finances.

Ben Brettell, senior economist at  Hargreaves Lansdown, said: “In contrast to the euro zone where weak prices are, at least in part, a symptom of an ailing economy, the fall in UK inflation should not be cause for concern. Given the fall is almost entirely caused by cheaper oil and food, it is good news for the UK economy. The effect should be broadly similar to a tax cut, easing the pressure on household budgets and boosting consumer spending.

“However, today’s data release further underlines the case for leaving interest rates on hold. Mark Carney has promised the Bank will ‘look through’ the effects of the falling oil price when setting monetary policy, but in reality it is almost impossible to see the MPC voting for higher rates while Mr Carney is penning regular letters to Mr Osborne. The effect of lower oil prices, plus the ongoing supermarket price war, could keep inflation below 1% for a number of months.

“Economic growth also looks to be weakening, with leading think-tank the NIESR forecasting Q4 GDP growth will come in at just 0.6%. The falling oil price should provide a boost, but given the absence of inflationary pressure, it is difficult to see why the Bank of England would even consider higher interest rates at present. I fully expect them to remain on hold throughout this year and into 2016.”

 Calum Bennie, savings expert at Scottish Friendly, said: “It hasn’t been a good start to the year for Mark Carney as he prepares to sharpen his pencil and become the first governor of the Bank of England in more than a decade to pen a letter to the Chancellor explaining why the inflation target has been undershot so significantly.

“However, the governor can take heart in the fact that he is working under some exceptional circumstances. The price of crude oil dropping to its lowest level in almost six years, and being half of where it stood six months ago, has been a significant factor in the fall in inflation as it trickles down into the wider economy.

“Providing low inflation is maintained and the UK economy does not slip into deflation, 2015 may offer a small but valuable respite to households, which will benefit from improving earnings growth, a lower cost of living and the prospect of the interest rate remaining at its current low throughout the year.

“Those people that do end up finding a little more money in their pocket over the year should act wisely and use this opportunity to prepare for the long term. Saving rather than spending is the name of the game here”.

Chris Williams, chief executive officer of Wealth Horizon, said: “The dramatic slide in the oil price – which was more than double the current level a year ago – coupled with frozen utility bills have all pushed the figure down, providing some respite for households.

“However, for investors the news is mixed. It means yields on longer-dated bonds and other asset classes will likely remain above inflation for some time, but those holding cash should not be expecting any interest rate hike in the near term to provide a lift to their returns. Investors could potentially generate an inflation-beating return by investing in a wide-ranging portfolio of assets.”

Guy Ellison, head of UK equities at Investec Wealth & Investment, said: “UK inflation on a CPI basis undershot expectations for December, coming in at 0.5% year-on-year and driven by a combination of lower food and energy bills. The core reading, excluding these more transient factors, actually increased marginally to 1.3% year-on-year and it is this number which the Bank of England should focus on when considering rate policy. Indeed, with the ongoing fall in the oil price there is a chance that headline CPI approaches 0% in the coming months.

“The broader reaction to today’s data is likely to be modest weakness for sterling, as the need for the BoE to raise rates sooner rather than later to ward off inflation diminishes.”

Howard Archer, chief UK and European economist at IHS Global Insight said: “Excellent news for consumer’s purchasing power with consumer price inflation falling back substantially to a 13-year low of 0.5% in December from 1.0% in November; it is now markedly below annual earnings growth (up to 1.8% in October itself).  This bodes well for consumer spending in 2015

” In fact, consumer price inflation at 0.5% in December was the equal lowest level since the series started in 1999.

” A further marked fall in producer input prices (down 2.4% month-on-month and 10.7% year-on-year) and a further drop in producer output prices (down 0.3% month-on-month and 0.8% year-on-year) in December further highlighted the current strength of disinflationary factors.

” Consumer price inflation was brought down in December primarily by sharply lower petrol prices and flat gas and electricity bills, while food prices remained muted as the supermarket pricing war continued.

“However, it is notable that core inflation actually edged up to 1.3% in December from 1.2% November, which likely reflected the fact that more retailer discounting than usual happened in November, reflecting the major discounting/promotions that were enacted for Black Friday.  Significantly, core consumer price inflation had dipped markedly to 1.2% in November from 1.5% in October.

“Given the weakness of oil and food prices, consumer price inflation looks poised to head down further still during the early months of 2015 and it could very well get near to 0.0%; it is also likely to remain below 1.0% through to the autumn at least. Consequently, we now see consumer price inflation averaging around  0.5% over 2015.

” With inflation likely to fall further and earnings growth now finally trending upwards, consumers should see appreciable improvement in their purchasing power in 2015. This is key for sustainable, healthy consumer spending growth. Already, consumer price inflation at 0.5% in December is 1.3 percentage points below annual weekly earnings growth of 1.8% in October (the latest available figure and up from 1.4% in September and 0.9% in August)).

“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.

“The further marked dip in consumer price inflation to 0.5% in December will heighten belief that the Bank of England will not be raising interest rates for some considerable time to come. This is despite the fact that Bank of England Governor has made clear that the Monetary Policy Committee will look through the fall in oil prices and focus on the underlying inflation picture.

” Indeed, we have recently put back our projection of the first interest rate hike from 0.50% to 0.75% to November from August, and there is clearly a very real possibility that the Bank of England will delay acting until early 2016.”

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