UK inflation drops to record low of 0.3 per cent

Britain’s inflation rate fell more than economists forecast in January, dropping to record low as food and fuel prices plunged.

Consumer-price growth slowed to 0.3 from 0.5 per cent in December, the lowest since the data series began in 1989, the Office for National Statistics said on Tuesday.

Based on a statistics office model, it’s the weakest since March 1960, when prices fell 0.6 percent. Economists had forecast a 0.4 per cent rate in January.

The Bank of England cut its near-term inflation projections last week to reflect the drop in oil prices, and Governor Mark Carney said the rate could fall below zero in the coming months.

The forecasts also show inflation rebounding starting at the end of this year and gradually rising above the bank's 2 per cent goal, setting the stage for an increase in interest rates by the Monetary Policy Committee.

“The MPC is firmly on hold near-term, with an expectation to hike over time, but not imminently,” said Michael Saunders, an economist at Citigroup Inc. in London. “We still pencil in the first rate hike for early 2016.”

Tuesday’s report showed that prices fell 0.9 per cent in January from December. Food and non-alcoholic beverages plunged an annual 2.5 per cent, while fuels and lubricants dropped 16.2 percent. Both were the biggest declines since detailed records began in 1997. Great Depression The pound was little changed after the data were published, and traded at $1.5365 at 9:38 a.m. London time. Gilts were also little changed.

The BOE’s projections show inflation averaging 0.12 per cent this quarter and 0.03 per cent from April to June. With wage growth picking up, that’s helping to boost workers’ real incomes. The last time the UK saw prices fall on average over a full year was during the Great Depression, according to a constructed historical series on the BOE’s website.

Carney has said a negative inflation rate will be “temporary” and the U.K. won’t experience deflation. “Enjoy it while it lasts,” was the governor’s message to consumers last week. “Inflation should fall further still over the coming months,” said Paul Hollingsworth, an economist at Capital Economics in London. “With little sign that low

inflation is becoming entrenched, though, the UK’s period of deflation should be of the ‘good’ sort.”

Price war

In addition to weaker energy prices, UK inflation is also being dragged lower by declining food costs amid a supermarket price war. William Morrison Supermarkets Plc on Monday became the latest grocer to announce price cuts. The rate of price growth based on the retail-price index fell to 1.1 per cent last month, the lowest since 2009, according to the statistics office.

In a separate release, the ONS said input prices at factories dropped 3.7 per cent in January from December and fell 14.2 per cent compared with a year earlier. Output prices fell an annual 1.8 per cent, the most on record. The ONS also published its latest house-price data, showing values increased 9.8 per cent in December from a year earlier. In London, prices were up 13.3 per cent.

Bloomberg