UK inflation hits 11-month high

19 January 2016

UK inflation registered its second consecutive month of growth in December, after remaining close to or below zero for much of last year as steep declines in the price of oil - which has reduced transport costs - begins to work its way through year-on-year comparisons.

The consumer prices index, which measures UK inflation, increased by 0.2 per cent in the year to December, up from 0.1 per cent in November and largely meeting analysts' forecasts.

According to the Office for National Statistics (ONS), the only substantial upward contribution to the annual rate came from transport, where prices increased by 1.8 per cent between November and December. This compares with a fall of 0.2 per cent between the same two months a year ago.

Air travel provided the largest boost, with air fares increasing by 46 per cent between November and December 2015 compared with a 19 per cent rise during the same period in 2014. The ONS says this is the largest November to December price increase since 2002.

Motor fuel prices fell by less than they did a year ago, with petrol prices down 3.4 pence per litre in December compared with 6.1 pence a year ago, while diesel fell by 2.3 pence this year compared with 4.8 pence a year ago. This reflects a slight stabilisation in the price of oil in December 2015 compared with December 2014.

The largest downward contributions to inflation came from food and non-alcoholic beverages, where prices fell by 0.2 per cent between November and December compared with a rise of 0.3 per cent between the same two months a year ago.

Alcohol and tobacco prices also fell by 1.3 per cent in December compared with a smaller fall of 0.2 per cent in 2014. Wine and spirits were the main contributors to the change, with both showing larger price drops than in the same period a year ago.

Low interest rate expectations

Despite the slight pick-up in inflation, it remains well below the Bank of England's annual target of 2 per cent, putting little pressure on the Monetary Policy Committee (MPC) to raise interest rates in the near future.

Comments from MPC member Gertjan Vlieghe on Monday (18 January) that 'the appropriate real interest rate for the economy might be very low for years to come' have also led to further speculation that an interest rate rise may not materialise before 2018.

'A slight increase in inflation to 0.2 per cent is unlikely to stir anyone's blood, least of all governor of the Bank of England Mark Carney, who will no doubt shortly put his summer 2015 comments about an interest rate rise around "the turn of the year" in the same dustbin as forward guidance,' says Russ Mould, investment director at AJ Bell.

'Powerful deflationary forces, including debt, demographics, the dollar and the price-crushing powers of the internet, are pushing back hard at the central banks and the battle lines are still being drawn.'

Good news for consumers

Mould adds that further loosening of monetary policy in the west could be on the cards in the next few years.

However, low inflation remains good news for consumers, who should benefit from lower prices, although it will continue to create pain for cash savers who are unlikely to see rates on current accounts and Isas increase in the next few years.

'If the cost of oil continues to drive down prices at the pumps and supermarkets continue their fight for market share with cheaper food, we can expect inflation to be hovering at this level for a while longer.

'There's little hope for an improvement in an interest rate rise for savers, so those looking to potentially grow their money over the long term should consider stocks & shares Isas, although risk is attached,' says Calum Bennie, savings expert at Scottish Friendly.

Add new comment