Last month British consumer price inflation (CPI) plunged to its lowest level in over 14 years, easing a squeeze on consumers. It looks set to fall further leaving the Bank of England under no pressure to raise interest rates soon, as Reuters reports. Financial markets are expecting the Bank to start raising rates only in early 2016. According to the Office for National Statistics, the rate of consumer price inflation halved to an annual 0.5 percent in December from 1.0 percent in November.
The British currency weakened after the data was revealed, and was close its lowest level against the dollar in 18 months.
Slower inflation will be a relief for British consumers as a boost to their spending power after years of weak wage growth.
Meanwhile, most economists say Britain, where consumer spending remains strong, faces less danger of deflation than the euro zone, where falling prices have sparked fears of a Japan-style economic stagnation.
Surveys of Britons' inflation expectations - the kind of thing that hints at whether purchasing will be delayed - show that they expect inflation to rise and to be fairly close to the Bank's 2 percent target in coming years.
As
years of prices rising faster than wages gave ground for the opposition Labour Party to criticize the government of David Cameron, this data may help the latter to battle the criticism.
On Tuesday crude oil prices fell to their lowest level in nearly six years, pointing to further falls in inflation. The ONS signalled falling petrol prices and lower electricity and gas bills compared with a year ago were the biggest factors pushing down inflation in December.
"We doubt that inflation has reached its low point yet," said Paul Hollingsworth, economist at Capital Economics, adding that he expected inflation to hit 0.2 percent in the coming months and could even dip into negative territory.
"That said, with the Bank of England focussed on the medium term outlook for inflation, its present weakness is likely to only act as a speed limit rather than an outright roadblock to raising interest rates."
BoE Governor Mark Carney last month described falling oil prices as "unambiguously net positive" for Britain's economy, Reuters says. The Bank is likely to say next month in a formal explanation to Chancellor George Osborne that the fall in oil prices will only have a short-run impact on inflation and that its concern is to focus on the outlook for inflation over a two- to three-year horizon.
In
November, the Bank predicted CPI would hit its target of 2 percent only
towards the end of 2017.
Food prices, which have been pushed down by a supermarket price war and lower commodity prices, fell 1.9 percent - their biggest fall since June 2002.
The ONS said prices at the factory gate fell 0.8 percent in the year to December, the biggest decline since September 2009 and a steeper fall than forecast by economists.
In December alone, crude oil prices paid by manufacturers fell by 13.2 percent - the sharpest drop since December 2008.
