UK Inflation Falls to 2%

UK inflation has hit the Government's 2% target for the first time since November 2009 - easing the pressure on the Bank of England to raise interest rates

Emma Wall 14 January, 2014 | 11:08AM
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Inflation has fallen to 2% - the first time the Consumer Prices Index has hit the Government's official target since November 2009. 

The Office of National Statistics credited the decrease to the slowdown in the price inflation of meat and fruit. The official rate of inflation for December showed the smallest annual increase in the price of food and non-alcoholic drinks in six years, up just 1.9%. However, electricity, gas and other fuels increased 3.7% on the previous year and alcohol and tobacco jumped 5.8%. Inflation in December fell to 2% from 2.1% the previous month. 

The fall in inflation eases the pressure on the Bank of England to raise interest rates. Bank Rate has been 0.5% for almost five years, during which the rate of inflation has varied dramatically. In September 2011, CPI inflation peaked at 5.2%, while instant access cash savings rates offered half this. Today, in order to beat inflation a basic rate tax payer needs to find a savings account paying 2.5%, and a higher rate tax payer needs 3.33% interest to beat inflation. According to Moneyfacts, there are currently 31 savings accounts on the market that do this, and 46 ISA accounts.

Now inflation has fallen, Bank governor Mark Carney has the conviction to continue with his forward guidance plans for Bank Rate. 

"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," said Chris Towner of currency specialist HiFX. "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."

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Emma Wall  is former Senior International Editor for Morningstar