Inflation dip gives Bank of England more options
An unexpected dip in inflation has strengthened Mark Carney's hand over the timing of the Bank of England's first interest rate hike.
The Office for National Statistics reported yesterday that consumer price inflation fell last month below the Bank of England's 2 per cent target for the first time since November 2009. Annual CPI inflation came in at 1.9 per cent in January, down from 2 per cent the previous month.
City analysts, who had expected no change in the rate, said subdued inflation would reinforce the determination of the Bank of England's Monetary Policy Committee to keep rates at the record low of 0.5 per cent to support the economy.
"They can continue focusing on ensuring the recovery continues," said James Knightley of ING. Philip Shaw of Investec said "a period of below-target inflation would give the committee a little more flexibility over exactly when it begins to raise rates."
Simon Wells of HSBC said prices were not likely to rise again soon and suggested the Bank might even start to consider the risks of excessively low inflation. "A few more prints like this and the BoE might start to worry about a more material undershoot in the inflation target," he said.
Financial markets currently expect the first rate rise to come in the second quarter of 2015, around the time of the next general election.
Last week Mr Carney said that, even though unemployment has fallen close to the Bank's 7 per cent forward guidance threshold two years sooner than it expected in last summer, the slack still justifies ultra-low rates.
The ONS said the major contributions apparently came from prices for recreational goods, furniture and also alcohol and tobacco. Core inflation, which strips out volatile items such as food and energy, eased to 1.6 per cent, down from 1.7 per cent in December. Analysts expected this to rise.
CPI inflation shot above 5 per cent in 2008, driven by a spike in energy prices. It fell back rapidly during the downturn, bottoming out at 1.1 per cent in September 2009, but then spiked to a 5.2 per cent peak in September 2011.
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