UK inflation falls to 1 per cent amid drops in air fares and fuel prices

LONDON – Consumer price inflation in the U.K. fell to a 12-year low of 1 per cent in the year to November as lower transport costs in the wake of the slide in oil prices diminished price pressures, official figures showed Tuesday.

The decline from 1.3 per cent the month before was greater than anticipated — the consensus in the markets was that it would moderate only to 1.2 per cent.

The Office for National Statistics said the fall reflects drops in transport costs, notably for fuel, air travel and second-hand cars. Prices of recreational and cultural goods were also contributors to the slowdown.

Bank of England Governor Mark Carney said last month that inflation is “more likely than not” to keep falling in the coming months and that growth will be slightly weaker due to a global slowdown.

If inflation falls below 1 per cent, Carney will have to write a letter to George Osborne, the U.K.’s treasury chief, explaining why it is over a percentage point below the 2 per cent target. As a result, many economists think it’s getting more unlikely that the Bank’s rate-setting Monetary Policy Committee will start raising the benchmark interest rate from the record low of 0.5 per cent.

“Against that backdrop, and given the myriad economic uncertainties which abound at the moment (domestic and external), it would be a brave MPC member who would be ready to start voting for rate hikes while the governor is simultaneously explaining why inflation is so far below target,” said James Ashley, chief European economist at RBC Capital Markets.