UK inflation plunges to record low of 0.5 per cent

UK inflation matched its lowest level on record in December when it fell to 0.5 per cent, official figures showed today.

The plunge to below 1 per cent will trigger a letter of explanation from Bank of England governor Mark Carney to chancellor George Osborne because it is more than 1 per cent off the Bank's 2 per cent target.

Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation at its lowest level since May 2000 — a record for CPI data going back to 1989.

Inflation has been dragged down by sliding fuel and food prices, which combined to pull it lower by 0.6 per cent in December. Flat household gas and electricity tariffs over the month — compared to a period last year when they were hiked sharply — made a major contribution to the drop in CPI.

The fall in inflation will ease pressure on household budgets as it boosts real-terms pay as well as pushing further into the future any need to raise interest rates. Bank of England policy-makers have said they expected CPI to fall below 1 per cent and remain there for months to come.

But the sharpness of the decline brings the UK uncomfortably close to the scenario in the euro zone, where there are fears of a damaging deflationary spiral after inflation fell to minus 0.2 per cent.

PA