CPI inflation figure hits record-equalling low of 0.05%

The CPI rate of inflation has fallen to 0.5%, equally the lowest level ever recorded.

The CPI rate of inflation has fallen to 0.5%, equally the lowest level ever recorded. - Credit: PA

The rate of Consumer Price Index inflation fell to 0.5% in December from 1% in November, equalling the lowest level on record, official figures showed today.

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% in December.

Flat household gas and electricity tariffs over the month, compared to a period last year when they rpose sharply, made a major contribution to the drop in CPI.

The plunge in the rate of inflation to below 1% will ease pressure on household budgets, but will be greeted with caution because it raises the spectre of the UK being caught up in a damaging deflationary spiral.

In the eurozone, prices have already slid into negative territory with inflation running at minus 0.2%.

Persistent deflation poses the risk that consumer spending, the engine of economic growth, will be slowed as shoppers enter a cycle of putting off purchases in the expectation that prices will fall.

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It also means debt such as mortgages becoming relatively more expensive.In a normal scenario with positive inflation, monthly repayments on a home loan would become relatively smaller as part of the household budget while income from wages should rise. This could be reversed by deflation.

The fall in inflation to below 1% means that Bank of England governor Mark Carney will have to write a letter to Chancellor George Osborne explaining why the figure has drifted more than a full percentage point from the central target of 2%,

Mr Carney’s letter will be his first since he became governor in July 2013, although it will not be published for more than a month.

It will also be the first time any governor has had to write such a letter because of Consumer Price Index (CPI) inflation falling below 1%, rather than going above 3%, since the bank’s Monetary Policy Committee was set up in 1998.

The conventions surrounding the open letter have changed, meaning it will not be published until late in February, alongside the minutes of that month’s rate-setting MPC meeting.

They previously appeared on the same day as the CPI figures, but under the latest guidelines set by Chancellor George Osborne, this has been changed to push the date back until the minutes of the subsequent MPC meeting.

Since the next policy meeting is not until the start of February, with the minutes published later that month, the letter relating to today’s CPI figure will not be produced until the second half of February.

The idea behind the delay is that, in addition to explaining why inflation has gone more than 1% above or below its target, there will be a chance for the MPC to decide on how it will respond.

Should inflation remain lower than 1% for three months or more, a further letter will have to be sent.

Mr Carney’s predecessor as governor, Mervyn King, had to write 14 letters to the Chancellor explaining why CPI was above 3%.

Records show that CPI did actually dip below 1% for large parts of 2000 and 2001, but at the time the Bank focused on a different measure of inflation and had a different target, so no letter was written by then-governor Eddie George.

More details to follow.