Published on 13 Jan 2015 Sections ,

Inflation drops to record low as oil prices tumble

Inflation falls from 1 per cent to 0.5 per cent, making a rise in interest rates even more unlikely.

Figures from the Office for National Statistics show the consumer prices index (CPI) dropped to 0.5 per cent in December, equalling the lowest level on record in May 2000.

It means Bank of England Governor Mark Carney has to write his first letter to the chancellor explaining why inflation is more than 1 per cent off its 2 per cent target. CPI has been below 2 per cent for 12 months in a row.

The Bank of England had already said it expected inflation to fall below 1 per cent and remain there for months to come.

The fall was driven by lower oil prices and household energy bills remaining flat compared with December 2013, when they rose sharply.

A fall in the rise of the cost of living eases pressures on household budgets and adds to hopes of a sustained increase in real-terms pay, with most recent wage rise figures at an above-inflation 1.4 per cent.

But an inflation rate below 1 per cent threatens to bring the UK uncomfortably closer to the scenario playing out in the eurozone, where there are fears of a damaging deflationary spiral after inflation fell to minus 0.2 per cent.

Supermarket price war

CPI dropped to 1 per cent in November and has been below the 2 per cent target since the start of 2014, with the key factors falling motor fuel and food prices, the latter sparked by fierce competition in the supermarket sector.

Food and non-alcoholic drinks were 1.7 per cent cheaper in December than the same month a year ago, the sixth month in a row of year-on-year declines.

Motor fuels fell 10.5 per cent year on year, the largest drop since July 2009. The price of a litre of petrol fell by 13.6p between December 2013 and last month, with diesel 15p lower.

Prime Minister David Cameron said on Twitter: “The fall in inflation is good news for families. Our long-term economic plan is on track and helping hard-working taxpayers.”

Chancellor George Osborne wrote: “Welcome news with family budgets going further & economic recovery starting to be widely felt. We will always remain vigilant that we have lower inflation for right reasons & today is yet further proof #LongTermEconomicPlan is working.”