Inflation has fallen to a record low of just 0.3%, driven down by falling oil and food prices. Expectations were that the Consumer Price Index measure would be 0.4% for the month of January, down from 0.5% the previous month. Sterling weakened slightly against the dollar and euro on the announcement.
While such low inflation is good news for consumers, it has caused concerns among some economists who fear the UK is entering a deflationary environment. Just last week Bank of England Governor Mark Carney was forced to admit he expected inflation to reach 0% this Spring, thanks to the effect of falling oil prices. This is significantly less than the Government set target rate of inflation of 2%.
“The most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices,” Carney stated in his letter to Chancellor George Osborne.
But the Governor added that he expected inflation to normalise later this year;
"On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year.”
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX welcomed this morning’s news that UK consumer price inflation is at a record low as it is it against a backdrop of an economy that is on the right path with robust growth and falling unemployment.
“The components where prices are falling are predominantly food and energy, neither of which people can hold off buying for any real length of time, so the risk of deflation is negligible,” he said.
“What this does is provide a boost to households’ disposable income and unless the current economic environment turns sour, it should result in increased levels of consumer spending. The interesting dynamic will be what impact it has on wage settlements which are a big focus for the Bank of England who have forecast wage growth to rise to over 3% this year and next.”
Food and energy prices have endured record annual falls through 2014 – 2.5% and 16.2% respectively – and we are already starting to see the positive impact that this is having on consumer disposable income. Nobody in the world wants to pay more for food and energy; the falls in prices are a de facto benefit for the economy.
Jeremy Cook, chief economist at World First agreed, saying that core prices – inflation without food or energy components – actually rose in January from 1.3% to 1.4%.
“This shows that underlying prices are nowhere near levels that could in any way be considered deflationary or at risk of deflation,” he concluded.
