UK inflation dips below the Bank of England’s 2% target in January to 1.9%, according to figures published today by the Office for National Statistics.
This is the first time in four years that inflation falls below 2%.
Despite the UK’s recent economic rebound, the Bank of England (BoE) had said there is no hurry to raise interest rates; latest inflation figures appear to underlie that message.
The Office for National Statistics (ONS) explained that the fall in the inflation rate was mainly driven by a decline in the cost of cultural and recreational activities, household goods, furniture, alcohol and tobacco.
Prime Minister David Cameron wrote through Twitter:
“Today’s fall in inflation is more evidence our long term economic plan is working. We want to ensure a secure future for hard-working people.”
UK inflation dips, but still higher than wages growth
Labour, the opposition party, which welcomed declining inflation, stressed that it would not help working people. Labour’s shadow Treasury minister, Cathy Jamieson pointed out that prices are still increasing at a much faster rate than wages and “the cost of living crisis continues.”
Mark Carney, the governor of the BoE, said on January 12th that he did not see UK interest rates rising for some time.
Good news for businesses and consumers
David Kern, Chief Economist at the British Chambers of Commerce said:
“The fall in inflation is very good news for businesses and consumers, and will strengthen the case for the Bank of England’s revised forward guidance policy that an early rise in interest rates is neither necessary nor likely. An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises.”
“The economy still faces many challenges, and every effort must be made to bolster the recovery. But since our current forecast suggests that inflation will remain at around the 2% target, it is now up to the Chancellor to use next month’s Budget to implement measures to boost enterprise and wealth creation.”
Stocks up, bonds up, pound down
The UK stock market surged after the release of the inflation figures. The FTSE 100 Index ended the day 0.9% higher with analysts predicting low interest rates for some time to come.
UK government bonds also increased, but the pound sterling fell against the euro to 82 pence (or €1.21 per pound) and the dollar to $1.67.
Bloomberg News quoted Iain Stealy, at JP Morgan Asset Management, who said “From a bond investors aspect [lower inflation] is a good things as it allows the BOE to keep monetary policy easy. This also benefits consumers and businesses, the heartbeat of the British economy.”
In an interview with the Telegraph, Kathleen Brooks,a research director at Forex.com, said “Fairly robust growth combined with low price pressures is considered the goldilocks scenario for an economy: not too hot, not too cold. This description hasn’t been used to describe the UK’s economy since well before the financial crisis, which is suggestive of the UK economy’s return to growth.”