-Michael Saunders, an economist at Citigroup Inc.
Britain's inflation continued to fall, declining to record low since records began in 1989, driven down by a plunge in food and fuel prices. The annual rate of inflation came in at 0.3% in January, according to the Office for National Statistics. The reading marked a move down from December's 14-year low of 0.5%. In the year to January, food prices declined 2.8% and prices of motor fuels plummeted 16.2%. Petrol in January was at the lowest price since November 2009, while diesel since February 2010. On a monthly basis, consumer prices dropped 0.9%, the largest monthly decline since January 2001. The core CPI, which strips out volatile components such as food, energy, alcohol and tobacco, increased in line with market's expectations to 1.4%. The last time Britain experienced a fall of prices on average over a full year was during the Great Depression. The inflation data is likely to push back further expectations of a rise in interest rates in the UK.
According to the BoE's February forecast, CPI inflation is likely to slide temporarily below zero in spring and remain around this level for the rest of the year. It then is expected to rebound around the turn of the year, as the effects of cheap energy prices drop out of the annual rate comparison. The BoE's estimates show inflation averaging 0.12% this quarter and 0.03% in the three months through June. With wage growth picking up, that is helping to boost workers' real incomes.
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