Interest rate rise unlikely in 2016 after record low annual inflation

 Consumer inflation was 0 per cent on average in 2015, the lowest level since records began in 1950

Interest rates are unlikely to rise in 2016 after UK inflation stayed subbornly low at 0.2 per cent in November to December.

This was still double November's 0.1 per cent increase in the Consumer Price Index measure of the cost of a basket of goods and services.

Consumer inflation was 0 per cent on average in 2015, the lowest level since records began in 1950. The Bank of England's target rate of inflation is 2 per cent, at which point it looks at raising interest rates.

Interest rates stayed put at 0.5 per cent when the Bank of England committee met in January. They may not follow the US by rising until 2017, over weaker than expected UK economic growth, the plunging oil price and jittery stock markets spooked by events in Asia.

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“In the UK, continuing low inflation has removed much of the impetus to raise interest rates, meaning ultra-accommodative monetary policy looks set to continue through 2016," said James Sproule, chief economist at the Institute of Directors.

Jonathan Thomas, senior economist for Lloyds Bank Commercial Banking said that while the inflation figures are reassuring, they do not mean that inflation is now on a firm upward trend towards the Bank of England’s 2 per cent target.

"The recent relapse in oil prices, which have now fallen to levels not seen since 2003, and further signs of global economic weakness, especially from China, are likely to preclude a robust pickup in overall price growth. With these factors in mind, we continue to expect the headline rate of inflation to remain below 1 per cent until late in 2016," Thomas said.

Transport is the main reason that inflation increased last month. Airfares increased 46 per cent between November and December 2015, compared to 19 per cent a year earlier. This is the largest increase in airfare since 2002, although it is not unusual for airfares to vary considerably, the ONS said.

Petrol prices are still falling, but at a slower rate than last year. The price at the pump fell less (3.4 pence) han it did a year ago (6.1 pence).

Meanwhile the price of food and drink and alcohol and tobacco fell in the last two months of the year. 

Price changes for cauliflour and potato crisps had the largest impact, the ONS said. The supermarkets are fighting a brutal price war to compete with discounters like Aldi and Lidl, slashing prices that have a knock-on effect on inflation through the CPI.

Added downward pressure from the falling oil price could also depress prices. 

Alcohol and tobacco also got cheaper, with wine and spirits especially showing larger price drops than a year ago. 

 

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