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UK Inflation falls to new low of 0.3%

In Market Analysis

The Consumer Prices Index (CPI) inflation data released this morning from the ONS http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/january-2015/index.html shows inflation dropping to its lowest level since records began in 1989.

It grew by 0.3% in the year to January 2015, down from 0.5% in December 2014. Falling prices for motor fuels and food were cited as the main contributors.

This data will only serve to reinforce expectations of a further fall in the coming months, moving into negative territory and a period of deflation for the first time in 50 years.

This is in stark contrast to the height of the economic crisis when the use of austerity measures were in effect; during this time inflation continually overshot the Central Bank’s targets and people were blaming the squeeze on wage growth and the subsequent high inflation for the slow economic growth.

Now the opposite is in effect. The Bank of England Governor Mark Carney and his fellow policymakers have a government-set target of inflation at 2%. The Governor has said strong economic growth should stave off the threat of a deflationary spiral.

 

CPI - 1989-2015

If inflation remains low for a sustained period, longer than expected, and the global economy remains weak, the BoE has hinted that it may even cut rates further to combat this and pump yet more money into the economy through quantative easing measures.

The more likely scenario, however, is that that rates are expected to rise at some point next year and that the falling in prices of these key consumer costs has come as a welcome reprieve for the general public, giving the average household an increase in their disposable income and a rise in the feel good factor leading up to the UK General Elections in May.

Cable jumped on the back the data release up to a high of above 1.54, now settling down 50 pips higher than before the figures at 1.5384

 

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