The latest inflation data released from the ONS shows is the lowest in 25 years, well below the Bank of England’s target of 2%. During the height of the economic crisis, inflation continually overshot the central bank’s target at a time of austerity and increases in unemployment. Wage stagnation and high inflation led to a squeeze on wage growth and played its part in a slow economic recovery.
When inflation overshoots targets the normal practice is to raise interest rates to curb the rise, however the MPC held rates at a record low. Concerns that ultra-loose monetary policy would cause spiralling inflation, have now reversed to fears of deflation. As the UK general election draws near the politicians in power have been quick to hale the low inflation as a positive for consumers.
The key components that were noted to have fallen by the ONS were food and fuel prices. Both are primary purchases for the average person, and a fall in prices following curtained increases is a welcomed reprieve. The increased level of disposable income adds to the all-important feel good factor, and could be decisive in the run up to the election.
Cable rallied on the back of the inflation data trading to session highs just shy of 1.54 (1.5396).
Link to full release Consumer Price Inflation, January 2015