UK inflation falls below BoE target of 2%

By Emily Cadman

UK consumer inflation has fallen below the Bank of England's 2 per cent target for the first time since November 2009, boosting the bank's case there is no immediate need to raise interest rates.

The headline consumer price index rose 1.9 per cent in January, compared with 2 per cent in December. The consensus among city economists had been for a rise of 2 per cent.

The below-target figure is good news for the BoE, which last week issued a bullish set of economic forecasts, predicting growth of 3.4 per cent this year, with inflation below 2 per cent and falling unemployment.

The BoE said it expected interest rates to "remain at low levels for some time to come". It believes there is still slack in the economy amounting to 1 to 1.5 per cent of national income. Falling unemployment would normally indicate a tightening of the labour market and inflationary pressure from higher wage claims. However, the bank believes a desire from involuntary part-time workers to work more will keep inflation low.

Inflation climbed as high as 5.2 per cent in the autumn of 2011. But stagnant wage growth has meant a decline in living standards for many. The hope is that low inflation, and increasing pay, will allow real wages to regain ground.

Eyes will now be on Wednesday's labour market data release, which is expected to show a further fall in unemployment, for any evidence of rising wages.

Chris Williamson, chief economist at data company Markit, said: "A drop in UK inflation to the lowest since November 2009 means the UK economy is enjoying a welcome combination of strong economic growth and low inflation.

"This 'Goldilocks' scenario adds to the scope for policy makers to keep their foot on the accelerator for longer via lower interest rates to help drive a strong and more sustainable recovery."

A Treasury spokesman said the fall of inflation to its lowest level in four years was a sign "the governments' long term economic plan is working, boosting economic security for hardworking people".

The Office for National Statistics said the fall in inflation was largely due to declines in the cost of recreational goods (notably DVD films and winter admission rates to a range of attractions) and falls in furniture and household equipment costs.

Gas and electricity prices made very little contribution to the change, with price rises and reductions largely cancelling each other out.

James Knightley of Capital Economics pointed to subdued pressures, with factory gate prices rising just 0.9 per cent year-on-year.

"With sterling remaining strong, pushing down import costs, energy and commodity prices remaining well behaved and wage pressures limited it suggests that inflation is likely to remain soft for several months.

"We do expect to see an uptick later this year with a strengthening labour market likely prompting a gradual rise in wages over coming quarters, but it is not going to be troubling for the BoE," he said.

Separately, the ONS reported a 5.5 per cent year-on-year increase in house prices, with average house prices reaching the PS250,000 stamp duty threshold in December. The increase was largely driven by London, where prices were up 12.3 per cent year-on-year. If London and the south east are excluded, prices increased by 3.1 per cent.

Speaking on Sunday, Bank of England governor Mark Carney rejected suggestions that keeping interest rates low would inflate a housing price bubble. He argued that much of the increase in London was being driven by cash buyers - over which the BoE has no monetary policy levers - and that outside the capital activity remained below historical averages.

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