Inflation dipped below 2% Bank of England target

Prices rose just 1.9% in January: Mark Carney looks like he got it right on forward guidance after all.

by Rachel Savage
Last Updated: 18 Mar 2014

Inflation edged below the 2% Bank of England target for the first time in more than four years. It’ll ease the pressure on Mark Carney to raise interest rates, who might be feeling rather smug this morning after dropping the link between unemployment and rates last week.

The Consumer Prices Index fell 0.1% to 1.9% in January, the first time it has dropped under 2% since November 2009, according to the Office for National Statistics. That means we spent the grand total of a month at the Bank’s magic mark.

DVDs, museum entrance fees, household goods, alcohol and tobacco were the biggest culprits behind the falling inflation rate (so much for minimum prices on alcohol then…).

Meanwhile, the retail prices index, which isn’t an official ONS statistic any more but is still used to calculate many benefits and pay packets, crept up 0.1% to 2.8% in January. Looks like wages (which rose at an average of 2.5% last year, according to the ONS) might feel a teensy bit more generous, while slowing price rises are going to make them go that little bit further.

The fall in inflation will bolster Carney’s case for backtracking on his flagship forward guidance policy introduced in August, when he said the Bank would consider hiking interest rates when the unemployment rate falls to 7% (it’s now at 7.1%).

Instead, the governor said the Bank would be looking at a broader range of economic indicators and would probably keep on keeping on with the whole low rates thing until after the general election next year.

David Cameron took to Twitter to crow that the fall in inflation was proof of the government getting it right:

Some economists have been worrying that falling inflation could herald Japanese style stagflation, especially as prices in the Eurozone are rising at less than 1% at the moment. Brits probably don’t need to worry just yet, as inflation is only just under target. However, if inflation continues to run out of steam Cameron might not have so much to chirp about.


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