Falling inflation due to food and petrol prices

Posted by Paul Anderson Riley in Credit Crunch on 16 January 2015 - Paul is a Credit Analyst at checkmyfile

A fall in petrol prices and reducing supermarket bills has seen the UK inflation rate fall to the lowest level since records began in 1989. In November 2014 the Consumer Price Index (CPI) measured inflation at a rate of 1%, falling to half of this in December 2014 (0.5%). The CPI, the government’s preferred measure of inflation, has only been at 0.5% once before in May 2000. A fall to 0.7% was expected by economists but the fall to 0.5% took the city by surprise.

Mark Carney of the Bank of England has confirmed that deflation in the UK is possible in the coming months. The last time Britain’s headline of inflation was negative was in March 1960. Carney suggests that deflation in Britain is not likely to be the unstable change that the Eurozone is currently facing, where spending is being put on hold in the hope prices will continue to fall.

The Bank of England’s target of inflation currently stands at 2% and George Osborne has welcomed this low level of inflation. George Osborne comments, “We have family budgets going further and the economic recovery starting to be widely felt. We will always remain vigilant that we have lower inflation for the right reasons”.

Labour Shadow Minister Shabana Mahmood says the government cannot take the credit for the falling inflation as it is other external factors that have affected prices. She says, “Plummeting global oil prices are the reason why the rate of inflation is falling here in Britain. But wages continue to be sluggish and the squeeze on living standards since 2010 means working people are £1,600 a year worse off under this government”.

Carney will have to explain in an open letter to the chancellor why inflation is currently 1.5% away from the Bank of England’s target. This is the first time a letter of this nature has been written, given that inflation has fallen below the target level.

The Office for National Statistics has revealed that the main driver of the fall in inflation has been the cheaper food and petrol prices that have been seen over the winter period. Fuel prices in December fell by 10.5% and food prices fell by 1.9%. Food prices have fallen due to the supermarket price wars that have been used in the battle for customers. The fall in inflation should give a rise to real wages for UK workers as they feel the benefit of cheaper prices.

IMF concern for Britain and economic recovery

The International Monetary Fund (IMF) is concerned that Britain’s reliance on credit cards and loans could stunt economic growth and put the past five years of recovery in jeopardy. The UK is currently on a warning list of countries that would be vulnerable to an economic crunch and the UK now has one of the highest household debt figures in the developed world.

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