Inflation falls to 12-year low

Figures released this week by the Office for National Statistics show that on the Consumer Prices Index (CPI) measure, the UK's rate of inflation has fallen to a 12-year low.

The Consumer Prices Index,which assesses the cost of basic household goods - fell to a rate of 1% in November from 1.3% in October.

Inflation as measured by the Retail Prices Index, while slightly higher than on the CPI measure, also fell to the lowest value of that index for several years, in this case from 2.3% to a five-year low of 2% .

The Office for National Statistics said falling fuel prices, caused by the decline in global oil prices, have brought the costs of both road and air travel down, with petrol prices down 5.9% in November.

Additionally, food prices fell by 1.7%, helped by supermarket price wars, while recreation and culture prices fell by 0.3%.

Both food and fuel account for a large part of the ONS' inflation calculations.

The Bank of England, which has been set a target for CPI inflation of 2%, said last month that the rate could drop below 1% in the next six months.

One consequence of the low level of inflation which will be good news for businesses and borrowers, though less good for savers, is that that the Bank is unlikely to raise interest rates from the historic low of 0.5% for some time. Of course, it also means that inflation will do less damage to the value of savings

If inflation were to fall below 1%, the Bank of England governor, Mark Carney, would have to write a letter of explanation to the chancellor.

Ben Brettell, an economist at Hargreaves Lansdown, told the BBC  that the Bank will not be too concerned by the fact that inflation is below target.

"A fall below 1% now looks likely, but the resulting letter of explanation from Mark Carney to the chancellor should be relatively easy to write," he said.

"A reduction in fuel costs is good news for the UK economy, and can be seen as broadly analogous to a tax cut. It should ease the pressure on household budgets and boost consumer spending."

I'm also extremely relaxed about inflation being below target as long as it does not actually go negative - falling overall prices can do horrible things to an economy, but so can rising prices. I raised my eyebrows at the idea that a drop in the world price of oil is analogous to a tax cut. One obvious difference is that reducing the price of oil is not something the government has done, though it is true that it has the effect of a transfer of spending power from the government to the citizens, which I presume is what Mr Brettell meant.

Basically low inflation is good news which will help the process of recovery.