UK inflation falls to a 4-year low at 2.1% in November


The lowest inflation for four years added to the UK’s economic purple patch yesterday, following strong quarterly growth and and declining unemployment in boosting the nation’s recovery prospects next year.

The Bank of England’s target measure, the consumer prices index, fell from 2.2 per cent to 2.1 per cent in November, a fraction above the Monetary Policy Committee’s 2 per cent target and the lowest since November 2009. The latest fall was driven by food and drink prices – unchanged last month, compared with a sharp increase a year earlier – and the impact of earlier gas and electricity price rises in 2012.

The impact of an average 10 per cent increase in energy bills will only be felt in December’s figures but the latest signs of softening inflation should give the MPC breathing space to keep interest rates at a record low of 0.5 per cent, even with growth of 0.8 per cent in the latest quarter.

Under the new Governor, Mark Carney, the Bank has committed not to consider interest rate rises until unemployment – currently 7.6 per cent – falls to 7 per cent. Yesterday’s inflation figures lessen the chances of the cost of living triggering the “knock-out” for Mr Carney’s forward guidance by running out of control and the Governor may have more good news to report soon, according to Investec’s chief economist, Philip Shaw: “The effect of the current round of gas and electricity price hikes should mean that CPI inflation nudges up over the next month or two. However to an extent this should be offset by continued disinflation in the food sector and it is entirely possible that inflation hits the 2 per cent target early next year.”

Inflation, albeit slowing, is still more than twice the 0.8 per cent annual increase in regular pay growth seen between July and September, prompting politicians to trade blows over the cost of living. A Treasury spokesman claimed the Coalition’s “long term economic plan is working” but the shadow Economic Secretary to the Treasury Catherine McKinnell: “This small fall in the inflation rate is welcome, but with prices still rising much faster than wages the cost-of-living crisis continues. Families and pensioners are still set to face inflation-busting hikes in energy prices this winter.”

Carl Astorri, chief economic advisor to the Ernst & Young ITEM Club, said: “While wage growth does still lag behind the pace of price increases, the gap is quickly closing, and we expect real wages to begin to rise in 2014. This should help to support consumer spending over the next year.”

Underlying inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 1.8 per cent in November compared with the same month last year, while pipeline pressures also remain subdued. Factory gate prices are up just 0.8 per cent on last year

By contrast the housing market – pumped by Government and Bank of England support schemes – saw prices rise 5.5 per cent in the 12 months to October – the fastest increase since September 2010. In London prices were 12 per cent higher than a year earlier, the highest increase since August 2010. Excluding the capital and the South-east of England, prices in Britain were 3.1 per cent ahead.

The Bank of England last month said it would end one of Britain’s programmes aimed at stimulating mortgage lending and keep a close eye on the housing market amid fears of a bubble.