Inflation drops to lowest level in nearly two years as petrol prices fall

16 January 2019

Inflation fell to its lowest level in nearly two years in December, pushed down by falling petrol prices.

According to the Office for National Statistics (ONS), the Consumer Prices Index (CPI) measure of inflation was 2.1% in December, down from 2.3% in November. The ONS’s alternative measure called CPIH, which includes housing costs, was 2%, down from 2.2% in November.

The lower inflation rate will come as welcome relief to hard-pressed families and especially for drivers. 

With wage growth now at around 3.3% and rising at the fastest rate in a decade, many will feel slightly better off, some for the first time in many years. 

The figure brings inflation to within reach of the Bank of England’s 2% target and could mean the Bank is less likely to raise interest rates soon.

The drop in inflation was driven by falls in petrol prices and from air fares, where ticket prices rose between November and December 2018, but by less than a year ago.

Head of inflation at the ONS Mike Hardie says: “Inflation eased mainly due to a big fall in petrol, with oil prices tumbling in recent months. Air fares also helped push down the rate, with seasonal prices rising less than they did last year. These were partially offset by small rises in hotel prices and mobile phone charges.

“House price growth was little changed in the year to November with buoyant growth across much of the UK, held back by London and the South East.”

The price at the pumps fell by 6.4 p per litre between November and December to 121.7p - the lowest since April 2018.

These downward effects were slightly offset by rises from accommodation services, mobile phone charges, games, toys and hobbies, and food.

The Bank of England raised interest rates in August for the second time in 10 years to 0.75% and has warned it may raise borrowing costs even in the the event of a smooth Brexit.

Howard Archer, chief economic adviser to the EY Item group, says: “We would not rule out two interest rate hikes in 2019 but we believe one is more likely as significant uncertainties persist - with expected lower inflation easing pressure for more aggressive Bank of England action.

“We expect this to be followed by two interest rate hikes in 2020 - taking rates up to 1.50% by the end of 2020.”

Mike Jakeman, senior economist at PwC, says: "The data will not change the thinking of the Bank of England, which will not make any changes to its monetary policy stance until more is known about the outcome of the Brexit process.

“The central bank would like to be able to raise interest rates from their current very low levels, but a lack of price pressure and a weakening economy means that this is not currently a viable option."

Brexit uncertainty continues to take its toll on the property market. In separate figures, the ONS says that UK house price growth rose slightly in November to 2.8%, up slightly from 2.7% in October.

Inflation-beating accounts

The good news for savers is that there are now even more inflation-beating savings accounts to choose from.

The shortest term that offers an interest rate that matches the current rate of CPI inflation is just one year, with Gatehouse Bank and Al Rayan both paying 2.10%.

In total there are now 106 fixed-term accounts that match or beat the CPI inflation rate of 2.10%.

To mitigate the damaging effects of inflation it is important for savers to choose the highest paying account.

If you leave your funds in an easy access account paying 0.15%, a deposit of £50,000 would be worth £45,404 in real terms over five years, at an inflation rate of 2.10%.

Tom Adams, head of research at savings advice site Savings Champion, says: “Savers are still having to tie their money up for at least a year to negate the damaging effects of inflation and despite the inflation rate coming down, it is still at a higher level than many savings accounts are paying.

“However, those who need more access to their money still do not have to accept paltry rates - particularly from the big high street brands.

“If savers can't tie up their funds, switching to at least mitigate the effect of inflation is far better than leaving the funds earning a pittance and by switching to the best possible rates, they are at least reducing the effect of inflation on money that they need access to.”

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