Food prices have been falling

The UK’s inflation rate fell to the psychologically important level of 2% in December, down 0.1% from the month before. It’s the first time inflation has been at or below the government’s target of 2% since November 2009 and means that Bank of England Governor, Mark Carney, can breathe a sigh of relief.

Mark Carney Governor of the Bank of England
Mark Carney
Governor of the Bank of England
The news that the Consumer Prices Index had fallen to a new low was welcomed by Prime Minister, David Cameron. He turned to Twitter, writing that it was “…welcome news that inflation is down and on target. As the economy grows and jobs are created this means more security for hard-working people.”

This is the sixth successive month that the Office for National Statistics (ONS) has reported a drop in inflation. The reason is that food prices have been falling – indeed, the change in the price of both food and non-alcoholic drinks was the smallest it had been since 2006. Discounts in the run up to Christmas also helped, with the prices of toys and computer games falling faster last month than they had a year ago.

By contrast, there has been a slight increase in the cost of road fuel; and the recent increases in domestic gas and electricity prices were announced after the latest data had been collected..

The new rate is still well above the growth in average earnings. However, some economists predict that this situation may end later this year when average pay rises start to rise above inflation. They also believe that the latest news will ease pressure on the Bank of England to raise interest rates in the light of the recent recovery in the economy.

Labour’s Treasury spokeswoman, Catherine McKinnell, said that the fall in the inflation rate was welcome, “but with prices still rising more than twice as fast as wages the cost-of-living crisis continues. After three damaging years of flat-lining, working people are on average £1,600 a year worse off under the Tories.”