Inflation finally falls to Bank of England's 2% target

Surprise drop in December hits mark for first time in four years, helped by a smaller rise in food prices and early sales discounts

Inflation unexpectedly fell in December, returning to the Bank of England's 2% target for the first time in four years.

A smaller rise in food prices compared with a year earlier offset a rise in petrol prices and the well publicised increases in gas and electricity bills. High-street discounting in the weeks before Christmas also helped lower the inflation rate, economists said, with toy and computer game prices falling .

The surprise fall drove the consumer prices index to its lowest level since November 2009, when it stood at 1.9%, the Office for National Statistics reported. Inflation has fallen sharply since June's high of 2.9%, and economists had expected it to remain unchanged last month at November's 2.1%.

Chris Williamson, chief economist at Markit, said inflation was likely to remain "close to, if not below, the 2% target for some time to come".

The fall in CPI inflation will be a source of relief for the Bank's monetary policy committee, under pressure to justify its ultra-loose policy stance despite economic growth and falling unemployment in recent months.Interest rates have been on hold at an all-time low of 0.5% since March 2009.

"Talk of higher rates has increased in recent weeks because the Bank of England has been wrong-footed by the strength of the economy," Williamson said.

A Treasury spokesman said the fall was "another sign that the government's long-term economic plan is working".

He added: "But the job is not done and times remain tough for many people. So an important part of the government's plan is helping hard-working people be more financially secure by increasing the tax-free personal allowance and freezing fuel duty and council tax."

Consumers will be hoping that lower inflation will raise the prospect of higher wages, which have been persistently outpaced by rising prices.

Catherine McKinnell, the shadow economic secretary to the Treasury, said that for now, household budgets in Britain remained under pressure: "This small fall in the inflation rate is welcome, but with prices still rising more than twice as fast as wages the cost of living crisis continues. After three damaging years of flatlining, working people are on average £1,600 a year worse off under the Tories."

Average annual wage growth, in the three months to October – the latest official data – was up 0.9%. The retail prices index, more broadly based than CPI and often used as a guide for wage bargaining, rose to 2.7% in December from 2.6% in November.

John Allan, national chairman of the Federation of Small Businesses, said December's fall in CPI inflation was a welcome relief for hard-pressed households and businesses. "With the economy now growing, our members will be pleased that pressures on the cost of doing business are easing, though some concerns over rising fuel and in particular energy costs remain," he said.

Consumer price inflation averaged 2.6% in 2013, the lowest since 2009 and down from 2.8% in 2012. The December inflation data confirmed the trend of easing food price inflation – driven by lower prices for food and meat – highlighted last week by the British Retail Consortium.

The BRC said food price inflation slipped to a three-year low in December, while overall shop prices fell for the eighth month running in December.

With deep discounting as shops battled for hard-pressed customers the drop in prices of 0.8% on a year earlier was the deepest deflation since the BRC's data began in December 2006.

Andrew Sentance, senior economic adviser at PwC, said the challenge was to keep inflation on target.

"Stronger growth here in the UK could push up wage costs and a rebound in the global economy is likely to push up energy, food and commodity prices once again. So we cannot be sure that this return to the inflation target will be sustained through 2014," said Sentance, also a former member of the Bank of England's monetary policy committee.

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Strong UK services data 'points to fastest economic growth in 15 years'

PMI score suggests economy grew by 1.2% in the three months to September, analyst says

Britain's economy may have expanded at its fastest pace in 15 years over the past three months, analysts suggested on Thursday, after an upbeat survey of the key services sector suggested it is growing at a healthy clip.

The monthly Purchasing Managers' Index for services declined slightly, to 60.3 in September, from 60.5 in August, but the average score over the quarter suggested the fastest growth in services output since mid-1997.

Chris Williamson, chief economist of data provider Markit, which compiles the survey, said taken together with similarly strong readings for activity in the much smaller construction and manufacturing sectors, this latest survey signals even stronger growth in GDP than the 0.7% recorded between April and June.

"Historical comparisons of the PMI with official GDP data suggest that the economy grew by 1.2% in the three months to September. This was a marked gathering in the rate of expansion compared with the 0.7% increase seen in the second quarter."

GDP growth Photograph: Graphic

Michael Tinsley, of BNP Paribas, added that in the second quarter of 1997, the last time the combined PMI surveys were this strong, GDP growth was 1.2% – well above Britain's long-term average – and averaged 1% every quarter over the following year.

"It remains to be seen whether the UK can repeat anything like that feat, and we would prudently expect some cooling in the data in coming quarters. But for now there is no mistake the economy is growing jolly fast," he said.

Firms reported that incoming new business had continued to be strong, they were hiring new staff, and expectations of future activity were also positive – a marked turnaround from the start of 2013, when many economists feared that the UK may have dipped into a renewed recession.

Howard Archer, of consultancy IHS Global Insight, described the latest survey as "very good news" – though he warned that it could force the Bank of England to take earlier action on interest rates than it currently expects. Under new governor Mark Carney's policy of "forward guidance", the Bank's monetary policy committee has pledged not to raise interest rates until the unemployment rate falls at least to 7%, provided inflation does not get out of control. The committee expects that not to happen for up to three years.

But many City analysts are betting that borrowing costs will have to rise sooner, as the economic recovery gathers pace. The first estimate of GDP growth for the third quarter of 2013 will be published later this month.

Earlier on Thursday, PMI surveys for the euro area suggested that the 17-member zone continued to clamber out of recession in the third quarter.

The services index jumped to a 27-month high of 52.2 – above the 50 mark that divides expansion from contraction. German activity expanded for the fourth successive month; while the French survey suggested the country's services sector scored its first expansion in more than a year.

The eurozone economy expanded by 0.3% in the second quarter of the year, marking the end of a gruelling 18-month downturn; but several member-countries, including Spain and Italy, and bailed-out Greece and Cyprus, remain in recession.

Article Source : http://www.guardian.co.uk

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