Inflation plummets to 12-year low

Falling food and petrol prices ease pressure on household budgets, official figure show

Updated: 
Christmas in London

Inflation fell sharply to a 12-year low of 1% in November as lower food and petrol prices kept a lid on the cost of living.

The Consumer Price Index (CPI) measure of inflation dropped more steeply than expected from 1.3% in October, the Office for National Statistics (ONS) said.

It means Bank of England governor Mark Carney only just avoids having to write to Chancellor George Osborne to explain why inflation is more than 1% off its 2% target.

But the continuing slide in oil prices is expected to feed through to a further drop in CPI. Mr Carney has already acknowledged that he is likely to have to write to Mr Osborne in the coming months.

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CPI has not been as low since September 2002 and was last lower in June 2002. It has now been at or below the 2% target for 12 months in a row.

November's figures showed food and non-alcoholic beverages fell by 1.7% on last year, the steepest drop since June 2002.

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Sharp falls in petrol price

Prices in this sector have been falling year on year for five months in a row - the longest such stretch since 2000 - amid fierce competition between supermarkets under pressure from Aldi and Lidl.

Motor fuel fell 5.9% as average petrol prices dropped by 3p per litre over the month and diesel fell 2.9p, both steeper falls than the same month last year. It comes as oil prices have sunk to a five-year low.

Food and motor fuel prices reduced the CPI rate by 0.4%.

The fall in inflation adds to hopes of a rise in real-terms wages which have lagged behind the increasing cost of living for six years.

Most recent figures for the three months to September showed pay rising by 1% year on year and regular pay excluding bonuses by 1.2%. Latest data will be published tomorrow.

No pressure to hike rates

Low inflation also gives the Bank of England leeway to leave historically low interest rates on hold at 0.5%, keeping the pressure off borrowers.

But a rate below 1% threatens to bring the UK uncomfortably closer to the scenario playing out in the eurozone where there are fears of a damaging deflationary spiral.

Today's figures showed that air fares fell more steeply month on month than a year ago, while second-hand cars were also cheaper.

Computer equipment such as printers also dropped in price, while computer game prices rose in November by less than a year ago.

The ONS said there were no notable upward contributions to the year-on-year CPI rate.

The Retail Price Index (RPI) measure of inflation, which includes housing costs, fell to a five-year low of 2%.

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Treasury Chief Secretary Danny Alexander said: "Falling oil prices have helped push inflation to its lowest level since 2002.

"This is a welcome early Christmas present to millions of families across the country.

"I am determined that the continuing oil price falls will be passed on to consumers as quickly as possible and in full."

Paycheques for families

Chancellor George Osborne wrote on Twitter: "CPI inflation hits 12 yr low of 1pc.

"Long Term Economic Plan now delivering growth, jobs, low inflation and rising pay cheques for families."

Paul Hollingsworth, UK economist at Capital Economics, said inflation, which had been expected to edge down to 1.2%, had further to fall and this was likely to act as a brake on interest rate rises.

He said the impact of falling petrol prices was unsurprising but the drag on CPI from computer games and PC equipment also suggested competitive pressures on the high street taking effect.

Meanwhile the continued fall in oil prices this month looked set to feed through to more fuel cuts for motorists, and the freeze on energy bills after a hike last year will also show up for December.

Mr Hollingsworth said: "While for now we think that outright deflation will be avoided, it is clear that inflation is set to fall significantly below 1% over the coming months and is likely to act as a significant brake on the pace of monetary tightening over the next couple of years."

Further to fall

James Knightley, of ING Bank, said: "Headline inflation is likely to fall further - a simple correlation between UK petrol prices and the price of Brent crude in sterling denominated terms suggests £1/litre petrol in the next month or so.

"This means Bank of England governor Carney looks almost certain to write a letter to the Chancellor explaining why inflation has deviated so far from the 2% target.

"It gives the BoE plenty of room to leave policy ultra-loose and so it is not surprising to see financial markets push back the timing of the first rate hike and sterling remaining under pressure."

Howard Archer, of IHS Global Insight, said the fall in inflation gave a boost to consumer spending power, cheering voters ahead of the May general election.

He added that, while deflation did not look a serious risk, a prolonged period of low inflation "could make the Bank of England increasingly wary about raising interest rates at all in 2015".

Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown, said: "Given the weakening growth outlook and 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 until at least Q4 next year, and quite possibly into 2016."

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