Inflation Shrinks Again

The latest data from the Office for National Statistics show that inflation is at a five year low.

The Consumer Price Index (CPI) fell to 1.2% in September, its lowest level since September 2009. A year ago it was 2.7% and in September 2011 the CPI peaked at 5.2%.

The latest leg of the decline in inflation is partly due to a drop in food prices (about one tenth of the CPI “shopping basket”) which is running at -1.4% – yes prices are falling by 1.4% year on year thanks to good weather conditions, the supermarket wars and Russia’s decision to stop EU food imports. The recent sharp drop in oil prices has helped, too: transport inflation (15% of the basket) is running at just 0.1%.

Whereas his predecessor as governor of the Bank of England regularly had to write letters to the Chancellor explaining why inflation was running more than 1% above target (i.e. over 3%), Mark Carney is within 0.3% of having to justify inflation that is more than 1% below target. If that happens, Mr Carney will be able to say the UK is by no means unique: Eurozone inflation is just 0.4% and US inflation is 1.7%, both below target.

The low rate of UK inflation poses another problem for Mr Carney: what to do about interest rates. Over the last year the governor has consistently said that rates will rise, although his hints on timing have been somewhat variable. A 1.2% inflation rate eases the pressure on Mr Carney to act sooner rather than later. The Bank of England’s Chief Economist, Mark Haldane, said that in current conditions “somewhere in the middle of next year” was “not a bad bet” in terms of the first rate rise.

All of which means that if you are waiting for bank deposit rates to rise after over five and half years of 0.5% base rates, you probably have at least another six months to go – a situation which seems to have been the case for a considerable while…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

 

5th December 2014

Comments are closed.