Plunging UK inflation dampens rate hike hopes

13th January 2015, Comments 0 comments

British inflation dived in December to a record low level on sliding oil prices, data showed Tuesday, sparking deflation fears and dampening the prospect of interest rate hikes any time soon.

The 12-month Consumer Price Index (CPI) halved to 0.50 percent last month, from a 12-year low of 1.0 percent in November, the Office for National Statistics revealed in a statement.

The new level equalled a record low set in May 2000 but also fanned fears of deflation, or a damaging period of falling prices that undermines economic growth.

"Inflation took another big step down in December and the halving in the oil price since the summer should mean that the UK comes within a whisker of deflation soon," said analyst Paul Hollingsworth at Capital Economics research consultancy.

The Bank of England (BoE) had voted last week to keep its main interest rate at a record-low 0.50 percent against a backdrop of sliding inflation.

- BoE facing pressure -

"December's ... inflation rate should increase the pressure on the BoE to postpone starting to raise interest rates," said economist Zach Witton at Moody's Analytics.

"We had expected the BoE would start to gradually increase rates in the second quarter. Yet, December's CPI significantly increases the risk that the BoE will not start raising rates until well into the second half of this year."

That would leave interest rates on hold until after Britain's general election in May.

The drop below 1.0-percent triggered a letter from BoE governor Mark Carney to British finance minister George Osborne.

The BoE's main task is to use monetary policy as a tool to keep 12-month inflation close to a government-set target of 2.0 percent.

When inflation strays more than 1.0 percentage point either side of the target, Carney is required to write a letter of explanation to Osborne.

December's CPI rate was pushed lower by sliding petrol prices and by flat domestic electricity and gas prices, compared with a year earlier when they were hiked sharply.

Oil has collapsed by almost 60 percent since June, as the market faced abundant supplies, demand fears and a strong dollar in a stuttering global economy.

Tumbling oil prices translate into lower inflation because they pull down energy, manufacturing and transport costs. They also force down the cost of refined crude products like petrol and heating fuel.

- Eurozone in deflation territory -

Tuesday's news came one week after separate data showed the 19-nation eurozone slid into deflationary territory in December, with inflation at minus 0.2 percent also on the back of slumping crude oil prices.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

However, Alpari analyst Craig Erlam downplayed a comparison with the eurozone.

"While people will be quick to compare the low inflation in the UK to that of the eurozone, which fell into deflation territory last month, the two situations could not be more different," Erlam said.

"While the eurozone is seeing broad-based deflation, high unemployment and therefore no wage growth, UK unemployment is very low, wages are already starting to rise -- which brings with it inflationary pressures -- and the areas in which we are seeing deflation do not carry the same threat that others would."

He added that falling prices of items like fuel and food, left consumers with more cash to spend elsewhere.

© 2015 AFP

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