Falling oil price eases CPI to 0.5%
Carney may be forced to explain as inflation slides to record low
The Bank of England governor Mark Carney (left) may be forced to write to the Chancellor as inflation fell to 0.5%, equalling the record low.
The Consumer Price Index (CPI) measure has matched the figure set in May 2000.
This should prompt the first letter to George Osborne from Mr Carney since the Canadian took over as governor in July 2013.
Mr Osborne will want to know why CPI, the Treasury’s preferred measure, is well below its 2% target and what can be done to get it back on course.
The low level of inflation means interest rates are unlikely to change and reduces the cost of living. However, constantly falling prices mean wages do not rise and that makes the cost of loans priced at fixed rates more expensive. Consumers faced with deflation tend to delay buying in the expectation that prices will continue to fall.
Inflation is being dragged lower at the moment by mainly by the sliding oil price which filters into household spending. There are concerns that the UK is following the eurozone into a deflationary spiral.
CPI dropped to 1% in November and has been below the 2% target since the start of 2014.
Inflation by this measure was last lower than 1% in June 2002, at 0.6% and in May 2000 when it fell to 0.5%.
Rain Newton Smith, CBI Director of Economics, said: “Inflation fell even more than expected this month.
“The good news is that lower petrol prices are leaving households with a bit more in their pockets, which should help to support spending and growth in the UK. However, while lots of businesses will also benefit from lower costs, North Sea oil producers are facing tough times.
“With falling inflation rates and subdued earnings growth, we do not see the first rise in interest rates happening any time soon. Even by the end of 2016 the stance of monetary policy is likely to remain loose, providing a bit more breathing space for the UK’s recovery.”
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, said: “December’s CPI figure was much lower than expected.
“This is welcome news as wages are now growing comfortably above the rate at which everyday goods are rising by. The latest figures for October showed wages rising 1.6% annually, which is still soft compared against historical data and considering the economy has been growing by around 3%. However it does mean that real wages (stripping out the effect of inflation) are now rising, leaving us all slightly better off.
“From an economic point of view, the timings of the reversal of real wages falling – as they had from 2009-2013 – is very convenient as there are some signs that the economy is cooling. With consumers now slightly better off, there’s a good chance spend on goods and services will increase, supporting domestic demand.
“The prospects of the Bank of England raising rates in the current environment where global price growth is slowing remarkably and in some cases, prices are actually falling, are very slim indeed. When you strip out the volatile energy component from the data, since central bank’s really have no control over the global price of oil, the rate did actually rise to 1.3%.
“However this is still only just above half the BoE’s 2% target rate and certainly doesn’t require taming. Sterling’s reaction was relatively muted, falling by less than half a percent against the dollar and the euro before recovering some ground. This to us indicates that the market has already largely discounted a rate hike from the BoE this year since CPI is the main gauge the Bank uses to determine its monetary policy decisions.
“With Carney and the majority of the MPC holding policy steady, the sterling’s direction in the months ahead will likely be heavily influenced by what other central banks do. With the ECB likely to announce QE either next Thursday or at their meeting in March, we expect to see the euro remain weak and for GBP/EUR to finally break through the 1.30 level.
“The FOMC have indicated a rate hike is coming – possibly by the summer, but markets are now less convinced that it will happen then. If this view becomes more widely held, the dollar strength that we’ve seen over the past six months would likely start to wane and GBP/USD should bounce back from the recent lows around 1.50.”
Helal Miah, investment research analyst at The Share Centre said: “With the recent drop in oil prices it was inevitable that the UK inflation rate would be dragged down. However, this morning’s CPI release showed that the price fall consumers experienced was more than expected. There was zero inflation between November and December, while the annual inflation dropped from 1% to 0.5%.
“With the supermarket price war intensifying, plans for energy utilities to set lower bills and the oil price continuing to fall, we believe there is scope for further falls and perhaps the possibility of deflation. Prior to this announcement, the first interest rate hike was expected in the third quarter of 2015. However, this should now be delayed and there may even be a possibility of no hike at all this year.
“Sterling has weakened moderately against other major currencies as a result of this morning’s announcement. While the prospect of deflation is worrying and partially reflects the relatively weak global economy, our view is this should only prove temporary. Delays to the interest rate rise is good for stocks and we believe that equities remain the asset class of choice.”