14 Jan 2014

UK inflation hits 2 per cent target

Consumer prices inflation drops to 2 per cent for the first time in over four years, in line with the government’s target. But Labour says the “cost-of-living crisis” has not gone away.

CPI, the government’s preferred measure of inflation, is at its lowest level since November 2009. It fell from 2.1 per cent in November 2013.

The sixth successive monthly drop in inflation eases pressure on the Bank of England, which would have to consider an interest rate hike if the cost of living was rising steeply.

The return to the 2 per cent target was welcomed by Prime Minister David Cameron, who tweeted: “It’s welcome news that inflation is down and on target. As the economy grows and jobs are created, this means more security for hard-working people.”

Food costs

The Office for National Statistics said the fall was due to smaller rises in the cost of food.

Coffee and tea were cheaper in December than the year before, although the price of bread and cereals accelerated. Games, toys and hobbies also saw price falls as Christmas approached, with reductions in computer games made for older platforms.

Rising petrol prices had an upward effect on inflation, but the increase in the rate of air fares was lower than in 2012.

Another measure of inflation, the retail prices index, rose to 2.7 per cent from 2.6 per cent in November.

‘Cost-of-living crisis’

Labour Treasury spokeswoman Catherine McKinnell said: “This small fall in the inflation rate is welcome, but with prices still rising more than twice as fast as wages, the cost-of-living crisis continues.

“After three damaging years of flat-lining, working people are on average £1,600 a year worse off under the Tories.”

James Knightley, of ING Bank, said wages could end up outstripping inflation again, which would ease the pressure on households.

“With the labour market strengthening, we will hopefully see wages start to pick up to the extent that incomes are rising faster than the cost of living,” he said.

“This would ease the squeeze on household finances and allow consumer spending to continue growing strongly.”

This squeeze was addressed by Ed Miliband in an article in the Daily Telegraph. The Labour leader said his party was determined to “rebuild our middle class” in the face of a cost-of-living crisis that was not just affecting the poorest.

Interest rates

Samuel Tombs, of Capital Economics, said CPI inflation was “likely to spend more time below the 2 per cent target than above it in 2014”.

He said this would enable the Bank of England to leave interest rates on hold for longer, regardless of whether unemployment falls to the 7 per cent threshold at which the bank has said it will consider raising them.