UK inflation slows sharply amid falling oil prices

AP News
Posted: Jan 13, 2015 9:59 AM

LONDON (AP) — U.K. inflation has slowed to its equal-lowest rate on record, an annual 0.5 percent in December, amid a drop in oil prices, the Office of National Statistics said Tuesday.

The drop will force Bank of England Governor Mark Carney to write a letter to Treasury chief George Osborne, explaining why inflation is over a percentage point below the bank's 2 percent target. Carney told the BBC that the figures were good news in the short term for British households — helping their pounds stretch farther.

"The issue is to make sure that this doesn't become more generalized and that we don't see low and falling prices more generally, because a little bit of inflation is good for the economy, it greases the wheels of the economy," he said.

He underscored that the bank has the responsibility to bring inflation back to its target level within a two-year horizon.

A sustained drop in consumer prices can be a concern if it encourages consumers to hold off big purchases in hopes of better deals later. The eurozone is facing such a danger and its central bank is considering a big stimulus measure to head off the possibility.

But economic growth is higher in the U.K. than in the eurozone overall, suggesting the Bank of England policymakers may be less worried about low inflation hurting business activity. Economists suggest the fall in oil prices will boost discretionary spending power.

"The risk that low inflation becomes ingrained looks small," said Paul Hollingsworth of Capital Economics. "So rather than being a risk to the recovery, low inflation is another reason to think that GDP growth will be strong again this year."

December's figure equals the 0.5 percent rate in May 2000.