UK consumer price inflation (CPI) dropped from 1% to 0.5% from November to December 2014, the lowest level since the beginning of recording CPI inflation in 1989, according to the latest data released by the Office for National Statistics (ONS).
According to the ONS, key drivers behind the price drop were falling gas and electricity prices as well as the continuing drop of motor fuel prices.
As for producer prices, the output price index for goods produced by UK manufacturers (factory gate prices) fell 0.8% in the year to December, compared with a fall of 0.6% last month. Meanwhile, the overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 10.7% in the year to December, compared with a fall of 8.2% in the year to November.
Guy Ellison, Head of UK equities at Investec Wealth & Investment comments on the results: The core reading, excluding these more transient factors, actually increased marginally to 1.3% year-on-year and it is this number which the Bank of England should focus on when considering rate policy.”
“Indeed, with the ongoing fall in the oil price there is a chance that headline CPI approaches 0% in the coming months. The broader reaction to today’s data is likely to be modest weakness for sterling, as the need for the BoE to raise rates sooner rather than later to ward off inflation diminishes” he adds.
The decline in inflation will force Bank of England governor Mark Carney to write a letter to the chancellor explaining the fall as it falls more than 1% below the 2% target. However, chancellor George Osborne already stated that he welcomes the inflation fall as boost to consumer spending.