LONDON (Reuters) - British inflation fell to the Bank of England’s target level in December for the first time in over four years, backing its case to keep interest rates at a record low and giving the government a boost ahead of elections next year.
Consumer prices rose 2.0 percent on the year in December, the Office for National Statistics said, the slowest increase since late 2009 and down from 2.1 percent in November.
Sterling wiped out most of its earlier gains as the unexpected fall in inflation pushed back bets on when the Bank might raise rates. British 10-year government bond yields hit their lowest level since December 3.
Prime Minister David Cameron, facing a concerted attack from the opposition Labour party over falling living standards, welcomed the figures. Labour highlighted how wages were still growing by less than half the rate of inflation.
Inflation peaked above 5 percent in 2011, pushed up by soaring gas and electricity bills, and the consumer price index had exceeded the central bank’s 2 percent target every month since December 2009.
Economists said the days of inflation way above the BoE’s target looked over and they predicted further falls in 2014. Citi expected consumer price inflation to slow to 1.7 percent by March. However, a recovering labour market could boost consumer demand and add to price pressures.
At 2 percent, British inflation is above that of all other members of the Group of Seven rich economies.
A former BoE policymaker warned against complacency.
“Stronger growth here in the UK could push up wage costs and a rebound in the global economy is likely to push up energy, food and commodity prices once again,” said Andrew Sentance, a vocal advocate of tighter monetary policy.
Economists in a Reuters poll had expected inflation to stay at 2.1 percent, the same rate as November.
Compared with the previous month, the consumer price index in December was up 0.4 percent, the ONS said.
The Bank said in August it would only think about raising record-low interest rates once unemployment falls to 7 percent, unless inflation threatened to get out of control.
Since then, unemployment has fallen quickly as Britain unexpectedly outpaced almost every other rich economy. But policymakers have said they are still in no rush to raise rates and Tuesday’s inflation reading is likely to help their case.
Simon Wells, an economist at HSBC, expects rates to remain on hold for some time but said growing employment and stagnating productivity are probably raising concerns at the Bank about the potential for future inflation.
“If the recovering labour market starts to feed through to stronger pay growth, tightening could occur much earlier,” Wells said in an email to clients.
The ONS said the biggest negative contribution to headline inflation in December was from food, especially fruit and meat, and recreational goods such as computer games.
An ONS official said the data was collected early in the month to capture discounting by retailers in the days immediately before Christmas.
Increases in power tariffs by utility companies had only a small overall effect on inflation in December and a further impact was likely to be seen in the future, the ONS official said.
An underlying measure of inflation, excluding energy, food, alcohol and tobacco, also suggested little immediate price pressure, slowing to 1.7 percent in December.
Factory gate prices rose by 1.0 percent in annual terms, faster than in November but slightly below economists’ predictions of a 1.1 percent increase.
Separate data showed house prices across Britain rose by 5.4 percent in the 12 months to November, slowing from 5.5 percent in October for the first decrease since April last year. In London, prices were 11.6 percent higher than a year earlier.
The Bank this month ended one of Britain’s programmes aimed at stimulating mortgage lending and has said it will keep a close eye on the housing market amid fears of a property bubble.
Writing by William Schomberg; Editing by John Stonestreet