Inflation falls to 1.9%

The Momentum UK Team 18 February 2014

In January, inflation fell to below the Bank of England’s target rate of 2% for the first time in over four years.

According to the latest figures from the Office for National Statistics (ONS), inflation in January reached 1.9% - down from 2% in December last year. The figures indicate that inflation was partly driven down by the price of furniture and other household goods, tourist attraction entry fees, and alcohol and tobacco.

This is the first time that inflation has been below the Bank of England’s target of 2% since November 2009 - economists believe that the aggressive discounting seen during the January sales is partly responsible, as retailers competed to offer the best deals. The rate of inflation has been steadily falling in recent months, after reaching it’s peak at 5.2% in September 2011.

According to economists, inflation looks set to continue falling over the coming months. As well as being good news for savers, this could mean that wage growth finally has a chance of overtaking inflation for the first time in years - potentially easing some of the pressure on squeezed household budgets. The last available data showed wage growth at just 0.9% in the three months to November last year.

Samuel Tombs, of Capital Economics, commented on the findings:

“There is a good chance that CPI inflation will fall to as low as 1% by the end of this year and remain subdued thereafter," said Samuel Tombs, UK economist at Capital Economics.

“This should enable real earnings to rise for the first year since 2007 and allow the [Bank's] monetary policy committee to keep interest rates on hold until well into next year.”

Meanwhile, the Bank of England has reaffirmed that it is in no hurry to raise interest rates, which have been at the historic low of 0.5% since March 2009. Bank governor Mark Carney said that he wasn’t willing to take risks with an economic recovery that is still “neither balanced nor stable” indicating that there won’t be a rise in rates before the general election next year.