UK consumer prices increased by just 1.0% year-on-year in November which was the lowest annual rate of inflation since September 2002. The plunge in the oil price is a key factor behind the weaker than expected rate of inflation. However, the lack of inflationary pressures is broad based. It is noted that the core measure of CPI inflation – which excludes food and energy prices – slipped unexpectedly too. The annual rate of core CPI inflation eased from 1.5% in October to 1.2% last month. The latter represents the lowest rate since December 2008.
Meanwhile food prices fell last month at their fastest rate in twelve-and-a-half years and have fallen by almost 3% since February. It is noted that the overall level of UK food prices fell to a 2-year low in November. Therefore this year’s Christmas dinner should be the cheapest in two years.
Given that the sharp falls in oil prices that have occurred this month have yet to feed into consumer prices, a further decline in the rate of inflation is anticipated in December. The price of a barrel of Brent crude oil averaged $70 per barrel in November. Today it is trading at $59pb and has averaged $66pb so far in December. Governor Mark Carney will start the New Year penning his first ‘Dear Chancellor Letter’ explaining why the annual rate of CPI inflation has deviated more than one percentage point away from the Monetary Policy Committee’s (MPC’s) 2% target. Consumer price inflation is expected to average around 0.6% in 2015. This would represent the lowest annual rate of inflation since the CPI series began in 1992 and makes the prospect of a 1% pay rise for many in the public sector more palatable than otherwise would have been the case. Given this inflationary outlook the Bank of England is not expected to raise interest rates until 2016 at the earliest.
In separate figures released today, it was revealed that the average price of a litre of petrol fell by 3.5p this week to 116.3p. This represents a decline of over 11% (almost 15p) since mid-July. As a result, the cost of filling up an average family car (60 litres) has fallen below the £70 mark for the first time since early October 2010. It should be remembered that the huge falls in the oil price experienced to date (over 45% in 6 months) will not feed through fully to the pump price in the forecourts. Two-thirds (or 78p) of the price of a litre of petrol in the UK is tax (fuel duty and VAT). Nevertheless, petrol prices will fall further and will provide a welcome boost to households’ beleaguered finances in 2015. This will benefit Northern Ireland in particular, given that local households spend more on petrol and diesel than any other UK region.