| 5.2°C Belfast

Inflation drops below 2% target


Inflation is set to dip below the Bank of England's 2% target for the first time in more than four years

Inflation is set to dip below the Bank of England's 2% target for the first time in more than four years

Inflation is set to dip below the Bank of England's 2% target for the first time in more than four years

Britain's squeezed households have been offered some welcome respite after inflation fell below the Bank of England's 2% target for the first time in more than four years.

The Consumer Prices Index (CPI) dipped to 1.9% in January from 2% in December, prompting experts to herald the start of a long run of below-target inflation in what will help ease the burden on stretched family finances.

January's fall in inflation also boosts the Bank of England's case for keeping interest rates at record lows of 0.5%.

Economists forecast that inflation will remain under the 2% target throughout 2014, raising hopes that wage growth will finally overtake rises in the cost of living.

Wage increases remained less than half the rate of inflation, at just 0.9%, in the last set of official figures for the three months to November.

But it is thought that rises in earnings and falling inflation will see real wages increase this year, giving consumers some much-needed spending power.

The drop in inflation marks the first time CPI has fallen below the Bank's 2% target since November 2009.

It comes after inflation fell to the threshold in December, ending a lengthy period of stubbornly high inflation.

Britain is now said to be facing a golden age of strong economic growth and low inflation - dubbed the "Goldilocks scenario" by one economist.

The Bank of England l ast week delivered a sharp upgrade to its growth outlook for 2014, to 3.4% from 2.8%.

But slack in the economy and falling inflation has given it breathing space to keep rates at ultra-low levels.

The Bank extended its pledge to keep rates at historic lows, despite abandoning its guidance linked to unemployment as a result of sharp improvements in UK joblessness.

It replaced the old guidance with policy based on a more complex framework linking rates to the output gap in the economy as measured by a series of 18 indicators - dubbed "fuzzy guidance".

Prime Minister David Cameron said in a message on Twitter: "Today's fall in inflation is more evidence our long-term economic plan is working. We want to ensure a secure future for hard-working people."

Inflation has now fallen for seven months in a row and was last lower in October 2009 when it hit 1.5%.

Since then, Britons have endured soaring costs with inflation reaching a recent peak of 5.2% in September 2011.

Samuel Tombs at consultancy Capital Economics said there was a "good chance" inflation would fall as low as 1% by the end of this year.

"This should enable real earnings to rise for the first year since 2007 and allow the Monetary Policy Committee (MPC) to keep interest rates on hold until well into next year," he said.

David Kern, chief economist at the British Chambers of Commerce, said the fall in inflation was good news for businesses and consumers and will strengthen the case that an early rise in interest rates is "neither necessary nor likely".

He said: "An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises.

"The economy still faces many challenges, and every effort must be made to bolster the recovery.

"But since our current forecast suggests that inflation will remain at around the 2% target, it is now up to the Chancellor to use next month's Budget to implement measures to boost enterprise and wealth creation."

The pound, which has reached a four-year high against the US dollar in recent days, fell back amid expectations that the weaker inflation figure will enable the Bank of England to keep rates at their record low for longer.

Chris Williamson, chief economist at Markit, said: "The UK economy is enjoying a welcome combination of strong economic growth and low inflation.

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

Tomorrow's unemployment figures will be watched closely for any changes to wage growth, while there is expected to be further optimism over the economic outlook with another fall in joblessness pencilled in.

The turnaround in the economy and easing of household budget pressures comes as a pre-election boost for the coalition.

Cathy Jamieson MP, Labour's shadow treasury minister, welcomed the drop in CPI, but cautioned the "cost of living crisis continues".

"Under David Cameron, working people are now on average £1,600 a year worse off," she said.

The figures from the Office for National Statistics (ONS) showed energy prices had little impact on the rate of inflation last month, as the recent round of price hikes were cancelled out by subsequent reductions in tariffs due to the Government's move to reduce environmental levies on bills.

Gas and electricity providers have been scaling back their winter bill rises to take account of the green levy shake-up, with British Gas lowering its recent tariff increase by 3.2%.

The biggest factor in driving down inflation was a fall in recreation and culture prices, with DVD films costing less and entrance fees slashed for a range of attractions.

The traditional post-Christmas rise in whisky prices was also lower than a year earlier, which saw the annual rate of inflation for alcoholic drinks and tobacco fall to 4.5% - its lowest level for nearly four years.

But there was little impact from last month's clearance sales on the high street, despite recent figures from the British Retail Consortium showing shop prices falling last month at their fastest rate since its records began - down by 1% against a 0.8% drop in December.

The ONS said one of the main notable drops in retail prices came from furniture and household goods, where discounts were ramped up on a year earlier.

The Retail Prices Index (RPI) measure of inflation - which is no longer classed as an official statistic by the ONS, but continues to be used to calculate many benefits and pay deals - rose to 2.8% in January from 2.7% in December.