UK consumer price inflation (CPI) has slowed to the Bank of England’s target level of 2%, for the first time since April 2006. The December release from the Office for National Statistics showed that CPI had fell from 2.1% in November to 2.0% in December.
The Bank of England targets 2.0% inflation, which has been consistently overshot since 2009. CPI is calculated from a basket of goods and services that is meant to represent household expenditure. The largest contributors to the fall were said to be the prices of food and non-alcoholic drinks, according to the ONS. The latest fall in the rate of inflation means a basket of goods and services that cost £100.00 in December 2012 would have cost £102.00 in December 2013.
The Bank of England had come under pressure that they would need to raise interest rates in the near term to reduce inflation risks. However this seems to be subsiding and the focus will now be on Carney’s 7% unemployment threshold laid out in the banks forward guidance. As the economic recovery in the UK begins to recover, there is an expectation that wage growth will return, after years of stagnation due to the economic crisis, which will push inflation higher.
There is some concern that that without inflationary pressures the BoE will leave with interest rates at the record low level of 0.50%, adding fuel to a potential housing bubble.
Following the CPI release sterling fell against the greenback from session highs, as the figure reduces pressure on Carney to raise interest rates in the near term.