12th February 2015
On the back of falling oil and food costs UK inflation is set to fall into negative territory and remain on the balance for the remainder of 2015.
In the Bank of England’s Inflation Report, published today, governor Mark Carney asserted that inflation is likely to “fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year”.
Inflation is now at its lowest level in the UK for the past two decades, with the latest reading showing that the cost of living has collapsed to 0.5%.
The Bank’s target is a much higher 2% and as a result Carney has sent an open letter to the Chancellor George Osborne explaining why it is so low and what the Bank’s Monetary Policy Committee (MPC), which is responsible for setting interest rates, is going to do about it.
The MPC estimates that two-thirds of the gap between the current inflation rate and the target is explained by sharp falls in food and energy prices.
Carey said this “s generally good news for British households and the headlines today “mask stronger underlying dynamics which will determine UK output and inflation tomorrow”.
He said: “The combination of rising wages and falling energy and food prices will help household finances and boost the growth of real take home pay this year to its fastest rate in a decade. This will support solid growth in consumer spending.
“The inflation forecast in today’s report shows inflation coming back to the target within two years and then rising a little further.”
He added that this can be accomplished by adjusting the pace and degree of interest rate increases in coming years. If low inflation persisted, the Bank could actually cut interest rates even further from their 0.5% historic low.
Carney said: “The prospect of limited and gradual rate increases may not make the headlines, but they will likely be consistent with the continued normalisation of the UK economy and with meeting the 2% inflation target.”
He noted too that despite renewed headwinds from geopolitics and deleveraging, modest global growth is expected to continue and that given oil prices have halved since six months ago, this represents a development, which is “unambiguously positive for the global economy”.
“The result of these underlying dynamics is that today’s projection for GDP growth is stronger than in November,” he added.
For both 2015 and 20616 the Bank anticipates economic growth of 2.9%