UK inflation hits 12-year low

Hot air balloons

Inflation has fallen to 1% for the year to 30 November, 0.2% lower than predicted and the weakest it has been for 12 years.

According to the Office for National Statistics (ONS), the consumer prices index (CPI) - the UK's measure of inflation - fell to 1% in November, down from 1.3% in October and its lowest point since September 2002.

The largest contributors to the fall were the transport and recreation and leisure sectors. The recent fall in oil prices contributed heavily to the former, with the ONS stating that the price of fuel has fallen nearly 6% over the past 12 months.

In recreation and leisure prices fell by 0.3% between October and November, compared with a rise of 0.4% over the same period a year ago. The largest downward contributions came from personal computing, notably accessories such as printers, as well as games, toys and hobbies - particularly computer games.

High street pressures

The drop-off in inflation was larger than expected, with most analysts predicting inflation would fall to 1.2% in November.

Paul Hollingsworth, UK economist at Capital Economics, says: "Whilst it was widely expected that CPI inflation would resume its downward trend in November, the drop in the headline rate was much larger than the consensus expectation.

"Given the 2.5% monthly fall in petrol prices, it is unsurprising that one of the largest contributions to the fall in CPI was transport. But a decline in inflation for recreational and cultural goods also knocked 0.1% off, perhaps indicating competitive pressures on the high street."

In his last inflation report, governor of the Bank of England (BoE) Mark Carney widely predicted that inflation would fall to 1% over the next year, as falling oil prices and lower global growth were likely to impact the UK.

However as Maike Currie, associate investment director at Fidelity, notes, the governor is still required to write an open letter to the chancellor of the Exchequer George Osborne explaining the fall, as it is 1% below the BoE's 2% target.


Good news

"Mark Carney will soon be sharpening his pencil to explain to the chancellor why inflation has fallen so far below target. Although with the effects of lower oil and food prices, it is not surprising that it has fallen to 1% and according to the Office for Budget Responsibility, it is expected that CPI inflation will remain below the BoE's target until 2017," she says.

In the short term Currie notes that this could spell "good news for British workers", whose incomes will be boosted by lower prices following five years of stagnant wage growth, while mortgagees will also benefit as the BoE is now likely to keep interest rates lower for longer.

However as Chris Williams, chief executive of Wealth Horizon, observes, the picture is less positive for cash savers.

"This bigger-than-expected fall pushes back the prospect for any rise in interest rates, and for investors waiting on the sidelines in cash this is a difficult time as they now face the prospect of earning virtually nothing on their savings for even longer," he says.

"Anyone in cash should think about reviewing their holdings now, looking for investments which, over the longer term, can deliver much more than rates being offered by banks on deposit accounts."

This article was written for our sister website Money Observer



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