Inflation falls to target levels

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Statistics have shown that inflation fell in December to the Bank of England’s two per cent target for the first time in more than four years.

The rise in food prices eased to see the Consumer Prices Index (CPI) rate drop to its lowest level since November 2009, when it stood at 1.9 per cent.

Today’s figure from the Office for National Statistics beat expectations that there may be a small rise from November’s 2.1 per cent figure, spurred by gas and electricity price hikes.

But while steep increases did have an upward impact, many of the tariff rises had not yet taken effect when the latest data was collected.

The sixth successive monthly drop in inflation eases pressure on the Bank of England - which would have to reconsider its flagship low interest rate policies should inflation look likely to spiral out of control.

The return to the 2 per cent inflation target was welcomed by Prime Minister David Cameron.

In a message on Twitter, Mr Cameron said: ‘It’s welcome news that inflation is down and on target. As the economy grows and jobs are created this means more security for hard-working people.’

The latest drop is a further decrease after inflation reached a four-year low last month.

Inflation last met its 2 per cent target – rather than hovering above or below it – in April 2006.

The latest figures showed the usual month-on-month rise in the cost of food and alcoholic beverages from November to December was the smallest it has been since 2006.

It meant the annual rate of inflation in the sector slowed to 1.9 per cent, the lowest rate since May 2010, indicating an easing in the usual pressure on household Christmas budgets.

Main downward contributions to this came from fruit and meat, while the price of fish was lower in December compared with November.

Meanwhile coffee, tea and cocoa were cheaper last month than they were the year before, though inflation for bread and cereals accelerated.

Games, toys and hobbies also saw price falls as Christmas approached, with reductions in computer games made for older platforms.

Rising petrol prices had an upward effect on inflation, but the increase in the rate of air fares was lower than in 2012.

A separate measure of inflation, the Retail Prices Index, rose to 2.7 per cent from 2.6 per cent in November.

A new measure of inflation, CPIH, which includes housing costs, was unchanged at 1.9 per cent. Another new measure, RPIJ, was also unchanged at 2 per cent.

James Knightley, of ING Bank, said a continuation of the trend could see wages outstripping the rise in the cost of living again, easing the pressure on squeezed households.

He said that with producer price pressures easing, and the strong pound making imports cheaper, there was growing optimism of inflation remaining close to the target this year.

‘With the labour market strengthening, we will hopefully see wages start to pick up to the extent that incomes are rising faster than the cost of living,’ Mr Knightley said.

‘This would ease the squeeze on household finances and allow consumer spending to continue growing strongly.’