U.K. Inflation Rate Drops to Lowest in Almost 15 Years

By Scott Hamilton and Tom Beardsworth

Photographer: Simon Dawson/Bloomberg

Customers push shopping carts as they pass offers on the ends of aisles inside a... Read More

Britain’s inflation rate fell to the lowest in almost 15 years in December, which will force Governor Mark Carney to write the Bank of England’s first open letter explaining why prices are rising too slowly.
Consumer-price growth weakened to 0.5 percent from 1 percent in November, the lowest since May 2000 and below the 0.7 percent median forecast of 37 economists surveyed by Bloomberg News. A separate report showed factory-gate prices, a leading indicator of inflation, fell the most in five years.
Plunging oil costs and supermarket price wars are driving the sharp slowdown in U.K. inflation. With price growth below the BOE’s 2 percent target and a weak euro-area
economy damping export demand, that’s helping Carney and his majority on the Monetary Policy Committee justify keeping the key interest rate at a record-low 0.5 percent.
“The headline rate could fall below zero in the coming months,” said David Tinsley, an economist at UBS AG in London and a former central bank official. “Pressure on the BOE to raise the interest rate has diminished very sharply.”
The last time the inflation rate was this low, Madonna was about to marry Guy Ritchie, American Beauty had just won the Oscar for Best Picture and the dot-com bubble had burst.

Food, Fuel

Chancellor of the Exchequer George Osborne said the fall in inflation was “welcome news,” with family budgets going further and the economic recovery starting to be widely felt.
The consumer-price data showed that food prices plunged 1.9 percent in December from a year earlier amid price cuts by supermarket chains including Tesco Plc and Wal Mart Stores Inc.- owned Asda to fend off competition from discounters. Reflecting the drop in crude oil, the price of gasoline has fallen about 18 percent from its 2012 peak, according to the statistics office.
The pound remained weaker against the dollar after the data were published and was at $1.5106 as of 10:48 a.m., down 0.4 percent from yesterday. U.K. 10-year gilts advanced.
In the fourth quarter, inflation averaged 0.9 percent, below the 1.2 percent forecast by the BOE in November.
While two members of the nine-person MPC have called for higher interest rates in recent months, investors are all-but ruling out an increase this year, Sonia forward contracts show.
Inflation more than 1 percentage point away from the BOE goal requires Carney to write to Osborne explaining the undershoot and how he intends to return it to target. Their exchange will be released on Feb. 18 alongside the minutes of the MPC’s February meeting.

Oil Costs

The last letter to the chancellor was written by then Governor Mervyn King in February 2012, when price increases were running above 3 percent. No letter has ever been triggered by inflation falling below the threshold since the BOE became independent in 1997.
A letter would be required every three months if inflation remains below 1 percent. Separate data today indicated it may be weak for some time.
Input prices at factories fell 2.4 percent in December from November and dropped 10.7 percent from a year earlier, the most since July 2009, the ONS said. Output prices declined an annual 0.8 percent, the most since September 2009.
Crude oil and petroleum products were the main drivers of the declines. Oil traded below $46 a barrel today and has fallen 60 percent from almost $116 on June 19 last year.