UK inflation falls to 2% target rate in December

Phil Gooding, ONS: "Consumers will be feeling the squeeze still"

The UK's inflation rate, as measured by the Consumer Prices Index, fell to 2% in December, down from 2.1% the month before.

It is the first time inflation has been at or below the government-set target of 2% since November 2009.

The Office for National Statistics said the fall was caused by slower increases in the prices of food.

Inflation as measured by the Retail Prices Index (RPI) rose to 2.7% from 2.6% in November.

The ONS said the rise in prices of both food and non-alcoholic drinks was the smallest it had been since 2006.

Analysis

On a tenth of a percentage point hangs a story.

Unchanged inflation at 2.1% might not have attracted much attention.

But a fall to 2% is an important symbolic moment for the Bank of England.

Not since November 2009 has the 2% inflation target been hit or bettered ( it was actually 1.9% in that month).

Ever since then, as the economy gained momentum in fits and starts, the Bank has faced criticism that it was ignoring its mandate.

The flak was at its most intense in the autumn of 2011 when annual cost of living increases exceeded 5%.

The inflation rate has fallen partly thanks to food price inflation easing which will be welcome news for consumers.

On the other hand motorists will have noticed a slight increase in the cost of fuel.

The latest 2% inflation rate is still well ahead of average earnings growth ( 0.8% excluding bonuses).

But some economists expect the long squeeze on households to end later this year when they predict average pay rises will start exceeding inflation.

Phil Gooding from the ONS told the BBC that a slowdown in the increase of fruit prices, particularly bananas and grapes, as well as meat prices helped to drive the fall in the inflation rate.

Discounts in the run up to Christmas also helped lower the inflation rate, economists said, with the prices of toys and computer games falling at a faster rate last month than a year ago.

However, hikes in gas and electricity bills as well as rising petrol prices had an upward effect on inflation, the ONS said.

The ONS figures were published the day before supermarket chains Tesco and Asda plan to reduce their petrol and diesel prices by up to 2p a litre.

Asda said from Wednesday motorists would pay no more than 126.7p a litre for petrol and 133.7p a litre for diesel, its lowest price for diesel since July 2012.

'Welcome relief'

The return to the 2% inflation target was welcomed by Prime Minister David Cameron.

"It's 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," he said.

Labour's Treasury spokeswoman Catherine McKinnell also welcomed the fall but added: "With prices still rising more than twice as fast as wages, the cost-of-living crisis continues."

Economists said the fall would ease pressure on the Bank of England to raise interest rates following the recent recovery in the economy.

Jeremy Cook, chief economist at currency exchange specialists, World First, said: "The lack of inflation will help stay their hand especially if the pace of job creation seen in the second half of last year also slows."

Chris Williamson, chief economist at Markit, said he now expected inflation to stay close to its 2% target for "some time to come".

"The easing in price pressures is a welcome relief to policy makers at the Bank of England and helps keep the spectre of higher interest rates at bay," he added.

Bank of England governor Mark Carney has indicated that the Bank will not raise interest rates until the unemployment rate, currently at 7.4%, falls below 7%.

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