CPI inflation likely drop further after 12-year low of 1%

Inflation has fallen to 1 per cent, its lowest level since June 2002, but economists say it has not reached the bottom.

In the year to November the CPI increased 1 per cent, a sharp fall from the 1.3 per cent posted for the year to October.

The declining cost of transport, whisky and some recreational goods drove the slowdown. Petrol prices dropped by 3p a litre over November, while airfares and second-hand car values have also sunk lower.

Food and fuel price decreases dragged the headline rate down 40 basis points for the year to November. Food costs have dropped 1. 7 per cent on a year earlier, while petrol is 5.9 per cent cheaper at an average £1.23 a litre in November.

The last time the CPI rate was as low as 1 per cent was September 2002; the last time it was lower was June 2002 when it hit 0.6 per cent.

Hargreaves Lansdown senior economist Ben Brettell says the 1 per cent rate is “little surprise” after falling steadily from 1.9 per cent in June.

“A fall below 1 per cent now looks likely, but the resulting letter of explanation from Mark Carney to the Chancellor should be relatively easy to write,” he says.

“A reduction in fuel costs is good news for the UK economy, and can be seen as broadly analogous to a tax cut. It should ease the pressure on household budgets and boost consumer spending.”

The data strengthens the case for leaving interest rates where they are, definitely until the final quarter next year and possibly even 2016, he adds.

Capital Economics UK economist Paul Hollingsworth says the 30 basis point plummet was larger than the expected fall to 1.2 per cent.

The price tightening in recreational goods shows real competition on the high street, and it is not just cheaper fuel pushing inflation down, he explains

“What’s more, core inflation fell sharply from 1.5 per cent to 1.2 per cent, indicating that weak price pressures are broad based and not just due to commodity prices,” he says. 

Oil prices have dropped by a quarter to below $60 a barrel which is likely to trim another 30 basis points off CPI and the price freeze on energy prices means it will add nothing to price levels in December.

“Finally, today’s producer prices data provided no evidence of price pressures building at the start of the production pipeline, with output price inflation remaining negative at -0.1 per cent in November,” he adds.

“Accordingly, while for now we think that outright deflation will be avoided, it is clear that inflation is set to fall significantly below 1 per cent over the coming months and is likely to act as a significant brake on the pace of monetary tightening over the next couple of years.”

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