British inflation falls below 2% target rate
Low inflation supports Bank of England decision to keep rates low
Britain’s annual inflation rate, as measured by the consumer prices index, fell to 1.9 per cent in January, below the Bank of England’s two per cent target rate.
It was the first time in more than four years that the inflation rate has fallen below the target. It backs the central bank governor Mark Carney’s decision to keep interest rates low.
Carney indicated earlier this month that interest rates would not rise for some time even with unemployment reaching a critical threshold.
Low inflation is considered a major problem in the eurozone, which had inflation of 0.7 per cent year-on-year in the first month of 2014, the lowest since 2009.
The European Central Bank has considered further lowering interest rates amid worries about deflation in the region. The worry is that unemployment and poor consumer spending will continue to push prices down.
British have faced rising prices
Britain has had the opposite problem, with high inflation eroding the spending power of households and making the fall in living standards a big political issue. One of the threats is pressure on wages as prices rise in the recovering economy.
Britain’s inflation stood at three per cent in the first half of 2013, but slid to two per cent at the end of the year.
Gas and electricity prices have risen in the U.K. but the cost of recreational and cultural activities fell, resulting in the modest 1.9 per cent inflation rate.
Prime Minister David Cameron was quick to claim credit for the low increase, tweeting that the “fall in inflation is more evidence our long term economic plan is working.”
Chris Williamson, the chief economist of Markit, described the combination of falling inflation and strong economic growth as a "Goldilocks" scenario. The Bank of England's policymakers will be able "to keep their foot on the accelerator for longer via lower interest rates to help drive a strong and more sustainable recovery."
The pound fell against a basket of currencies on Tuesday on the expectation that interest rates would not rise.
With files from the Canadian Press