UK inflation drops below Bank of England target

Feb 18, 2014

Bank says rate will fall further from today's 1.9 per cent figure, reaching 1.7 per cent in March

BRITAIN'S inflation rate fell to 1.9 per cent in January, dipping below the Bank of England's target of two per cent for the first time since 2009 and reinforcing the bank's claim that there is no immediate need to raise interest rates.

Economists polled by Reuters said that the fall had come as a surprise, but was in line with Bank of England predictions that the rate would reach 1.7 per cent by March.

"With sterling remaining strong, pushing down import costs, energy and commodity prices remaining well behaved and wage pressures limited, inflation is likely to remain soft for several months," said ING economist James Knightley. "We do expect to see an uptick later this year with a strengthening labour market likely prompting a gradual rise in wages... but it is not going to be troubling for the BoE."

The drop in rates follows aggressive discounting by retailers around the country last month, with high streets seeing widespread deflation, The Guardian reports. The British Retail Consortium issued a report saying that shop prices fell at their fastest rate last month, falling by one per cent against a 0.8 per cent drop in December.

Petrol prices have also been easing, while energy tariff increases are likely to be less steep than this time last year due to the government's bid to reduce environmental levies on bills.

Hugh Pym, chief economic correspondent for the BBC, says that "hikes in gas and electricity prices did not, in the end, rock the inflation boat, although that was helped by government initiatives to ease the burden of green obligations".

David Cameron tweeted this morning: "Today's fall in inflation is more evidence our long term economic plan is working. We want to ensure a secure future for hard-working people."

Labour replied that the news was unlikely to have any impact on ordinary workers.

"This small fall in the inflation rate is welcome, but with prices still rising much faster than wages the cost-of-living crisis continues," shadow Treasury minister Cathy Jamieson said.

Will the fall have any palpable effect? Analysts believe that if the rate stabilises, it could help business.

"An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises," says BCC chief economist David Kern.

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