UK inflation falls below Bank of England's 2% target

Rate dropped to 1.9% in January, the first time it has dipped below target in more than four years

Inflation fell below the Bank of England's 2% target for the first time in more than four years in January, brightening the outlook for Britain's squeezed consumers.

The annual rate of inflation dipped to 1.9% last month from 2% in December, according to the Office for National Statistics, driven lower by prices of furniture and other household goods, alcohol and tobacco, DVDs and tourist attraction entry costs.

It was the first time since November 2009 that inflation has fallen below target. Economists said the figures reflected particularly aggressive discounting this year as retailers competed in the January sales.

Inflation has been falling steadily in recent months after reaching a peak of 5.2% in September 2011. It finally returned to the 2% target for the first time in four years in December.

Economists said inflation was likely to fall further in the coming months, boosting the chance that wage growth will outpace inflation in 2014 for the first time in years, easing the pressure on household budgets.

Wage growth was just 0.9% in the latest available data for the three months to November, still less than half the inflation rate.

"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."

Despite a backdrop of falling inflation and economic growth, the Bank of England made it clear last week it is in no hurry to raise interest rates – which have been at an all-time low of 0.5% since March 2009 – suggesting there would be no rise until after the general election next year.

The Bank's governor, Mark Carney, said its policymakers would not take risks with this recovery, which is as yet "neither balanced nor sustainable".

The retail prices index, historically used to calculate wage rises, rose to 2.8% in January from 2.7% in December, driven higher by insurance, air fares and fuel prices.

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City leads way in economic growth race

Optimism throughout financial services sector rose at its fastest rate since the start of the survey in 1989 in the final three months last year

An upsurge in optimism, business and jobs is turning the City into the fastest growing part of the economy it is shown in new survey data released on Monday.

Optimism throughout the financial services sector rose at its fastest rate since the start of the survey in 1989 in the final three months last year. For the fifth quarter in a row profitability was higher and employment is growing at its fastest rate since 2007.

City firms recruited another 10,000 staff in the October-December period and are forecast to add a further 15,000 to the job total in the first quarter this year. That would take employment to 1.16m, only 52,000 below the peak in the Square Mile at the end of 2008 just before the financial crisis began to bite.

The latest insight into the way recovery is feeding into the financial services sector, produced by the CBI and business advisers PwC, shows strong volume growth in all key customer categories with the exception of financial institutions and a notable pick-up in activity with industrial and commercial companies.

There are no signs of a slowdown with the volume of business predicted to grow further in the first quarter and profits set for “robust” improvement. For the first time since the financial crisis all sectors plan to increase capital spending over the next year.

Fee, commission or premium income jumped 36pc in the quarter, the fastest since June 2012. Trading income was up 20pc and while total costs rose 23pc they were almost cancelled out by volume growth.

Banking optimism is continuing to “rise briskly” with business volumes heading for strong first quarter growth. The survey suggests banks are beginning to get a grip on new regulations which are seen as “less of an obstacle” to growth and priorities shifting to retaining customers.

Building societies are feeling more optimistic about the business outlook than at any time during the past seven years after a lower than expected growth in volumes in the final quarter last year.

Private investors provided a business fillip for finance houses while optimism among life insurers jumped faster than at any time over the past decade. General insurance is enjoying a gradual recovery in confidence and although optimism among insurance brokers has risen moderately business volumes increased at their fastest in four years.

Matthew Fell, CBI director for competitive markets, feels the survey shows “things are starting to look more ‘normal’ after five years of volatility.” He is encouraged by the strength of longer term confidence indicators with marketing spend, employment and investment rising strongly.

Kevin Burrowes, head of PwC’s financial services operations, said regulation is now seen as a lesser obstacle to growth in the banking sector and although compliance remains a major concern “it is slightly less all-consuming than it was.”

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