The annual consumer prices index (CPI) measure of inflation eased to 1.9pc in January, from 2pc in December – the first time inflation has fallen below target since November 2009 – according to the Office for National Statistics (ONS).
Lower inflation eases pressure on Bank of England’s Monetary Policy Committee to begin hiking interest rates as it seeks to secure Britain’s recovery. Last week, the Bank upgraded its forecast for UK growth to 3.4pc in 2014, from a previous prediction of 2.8pc, reports The Telegraph.
“Fairly robust growth combined with low price pressures is considered the goldilocks scenario for an economy: not too hot, not too cold,” said Kathleen Brooks, research director at Forex.com. “This description hasn’t been used to describe the UK’s economy since well before the financial crisis, which is suggestive of the UK economy’s return to growth.”
Bigger discounts at a range of attractions and falling DVD prices provided the biggest downward contribution to inflation last month, the ONS said, while sterling’s recent strength has also helped to ease the pressure of price rises.
The last of the “Big Six” energy firms’ price hikes fed through in January, with E.ON and EDF Energy raising prices by 3pc. However, the ONS said this was largely cancelled out by British Gas, Britain’s biggest energy supplier, which cut prices by 3.2pc to reflect the Government’s recent reduction in environmental levies on bills.
It said the “only notable upward contribution” came from smaller decreases in the price of personal care products such as “toothbrushes and baby wipes”.
“The fall in inflation is very good news for businesses and consumers, and will strengthen the case for the Bank of England’s revised forward guidance policy that an early rise in interest rates is neither necessary nor likely,” said David Kern, chief economist at the British Chambers of Commerce.
“An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises.”
In a subtle change of tone, Bank policymakers have started to remind homeowners that they should prepare for rate hikes. David Miles, an external member of the Monetary Policy Committee, said yesterday that borrowers should start thinking about the impact of a rate rise on their personal finances.
“[It is] important that there is a clear recognition by borrowers and lenders that interest rates will not remain at this level for many years to come,” he said. “They need to think very carefully what’s going to happen when the cost of that mortgage moves up.”
Markets currently believe the Bank will hike rates from their record low of 0.5pc in the first quarter of 2015. Spencer Dale, the Bank’s chief economist, said last week that this view was “reasonable”.
Tuesday’s data showed annual core inflation, which excludes energy and food, fell to 1.6pc in January, from 1.7pc in December, its smallest increase since June 2009, while the CPIH measure of inflation, which includes housing costs, fell to 1.8pc, from 1.9pc in December.
The retail prices index (RPI) measure of inflation, which is no longer classed as an official statistic by the ONS, but is still used to calculate many benefits and pay deals, rose to 2.8pc in January, from 2.7pc in December.
The Bank of England revamped its flagship forward guidance policy last week, replacing its single unemployment rate threshold with a broad range of variables including wage growth, business investment and consumer spending.
“The current inflation reading will give some confidence to the Bank that inflation will remain below target for the time being, particularly given the fall in the core rate, and will help reinforce the new fuzzy form of guidance for now,” said Colin Bermingham, an economist at BNP Paribas.