UK inflation rate falls to 0.5% in December

Bank of England governor Mark Carney spoke to the BBC's Economics Editor Robert Peston

The UK inflation rate fell sharply to 0.5% in December, the joint lowest on record, official figures show.

Inflation as measured by the Consumer Prices Index fell from 1% in November to its lowest rate since May 2000, helped by cheaper fuel prices.

Low inflation could mean lower interest rates for longer, Bank of England governor Mark Carney told the BBC.

However, he said he still expected rates to "move up over the course of the next couple of years".

A fall of inflation below 1% triggers a letter of explanation from Mr Carney to the chancellor.

This is because the CPI rate is more than one percentage point away from the Bank's 2% target.

The Office for National Statistics (ONS) also said that the Retail Prices Index (RPI) measure of inflation fell to 1.6% from 2%.

The ONS said that in addition to falling fuel prices, the drop in inflation was also due to the rises in gas and electricity prices in December 2013 falling out of the equation.

George Osborne said it showed the government's economic policy was on track

Economists said that a further fall seems likely, bringing the UK closer to the scenario playing out in the eurozone, where deflation has become a problem for policymakers.

Paul Hollingsworth, of Capital Economics, said inflation could fall to about 0.2% in February, and that an outright drop in prices was possible.

Martin Beck, senior economic advisor to the EY Item Club, said a negative reading in February "is now looking more likely than not" as the impact of further oil price falls had yet to feed through.

Chancellor George Osborne hailed the fall in the inflation rate as good news. He tweeted: "Inflation is 0.5% - lowest level in modern times. Welcome news with family budgets going further & economic recovery starting to be widely felt."

Danny Alexander, Liberal Democrat chief secretary to the Treasury, said lower inflation was acting "like a giant giant tax cut for the economy".

But Labour's shadow Treasury minister, Shabana Mahmood, said the squeeze on wages and living standards meant working people "are £1600 a year worse off under this government... And falling energy costs are still not being fully passed on to consumers".

Keeping interest rates at record low levels for longer could be a way of mitigating low inflation, Mr Carney told the BBC.

But he stressed that the Bank still expected to raise rates gently within the foreseeable future.

"It will be an environment, most likely, that interest rates start to increase and move up over the course of the next couple of years," he said.

www.bbc.co.uk

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