Annual UK Consumer Prices Inflation (CPI) fell to 0.5% in December – its lowest level since May 2000.
The Office for National Statistics (ONS) said CPI dropped from 1% in November, driven mainly by December 2013 gas and electricity price rises falling out of the calculation and the continuing drop in motor fuel prices.
The ONS said: “In December 2013 a number of the major utility companies raised their prices. In contrast there were no increases in December 2014. The price of petrol and diesel at the pump continues to fall and this has also contributed to the lower rate of inflation. Petrol and diesel prices are now almost 25p per litre below their peak prices in April 2012.
“While the rate of inflation fell, there was some upward pressure from prices for alcohol – notably wine and spirits. Prices, overall, usually fall for alcohol in the run up to Christmas. In 2014 the majority of the fall came in November, with the ensuing December fall being smaller than usual.”
The Monetary Policy Committee’s current target is a CPI rate of 2% per annum.
Meanwhile, the Retail Prices Index (RPI) fell by 0.4% to 1.6% in December.
Kames Capital said tumbling inflation would keep UK interest rates at record lows in 2015.
Head of multi-asset Scott Jamieson said: “The headlines are going to blame the slump in the crude oil price; last trading at $46 per barrel, it was priced over $100pb less than six months ago. Certainly the attribution provided by the ONS highlights the decline in transport and other oil-related components.
“However the CPI rate has been slipping steadily for some time now and is less than 10% of the level reached in late 2011; only recently have lower energy costs been a contributory factor. Pricing power remains weak and although job creation has been heady it has not been accompanied by even moderate wage growth. Finally, the rise in strength seen through 2013/2014 has also taken its toll.”
Fidelity Worldwide Investment retirement director Alan Higham said the announcement hid a “tsunami of higher inflation”.
He added: “Over the next 15 years, the yields on inflation-linked gilts and fixed income gilts suggests that the market is expecting inflation to average 3% over the period. Inflation could easily return to exceed 5% per annum within the next 15 years.
“For people looking to secure a retirement income, they should remember their pensions need to last for 20-30 years and take the prospect of rising inflation seriously. In the short term, the triple lock on the state pension will see rises of at least 2.5% but whether this policy survives after the general election remains to be seen.
“People reaching state pension age before 6 April 2016 can benefit from very generous terms to increase their state pension with its inflation protection by deferring taking it. Consider using the new pension freedoms to fund your retirement from private pensions whilst deferring the state pension.”
This comes in the same week the Institute for Fiscal Studies (IFS) described the Retail Prices Index (RPI) as “flawed” and said it should be scrapped as a measure for inflation.
An independent review of UK consumer price statistics carried out by IFS director Paul Johnson for the UK Statistics Authority, said there were “basic statistical flaws” in the construction of the RPI and called for the government and regulators to replace it with the CPI as its main measure of inflation.
Johnson said the CPI was a “well-constructed” measure of inflation which users should have confidence in. He added, however, that while the CPI was reliable, it should also account for owner occupiers’ housing costs (CPIH).
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