The Pound Sterling to US Dollar (GBP/USD) exchange rate tumbled to a new 18-month low and more declines are forecast after data released by the London based Office for National Statistics (ONS) showed that inflation in the UK fell to a record low of 0.5%.
Pressure on Bank of England (BoE) Eases
December’s inflation rate is the joint lowest on record, the last time UK inflation fell to such a low level was in May 2000.
Many economists had been forecasting for an inflation rate of around 0.7% The sharper than forecast decline now means that Bank of England governor will have to write a letter to Chancellor George Osborne to explain why inflation has fallen so sharply.
On a month on month basis inflation remained unchanged at 0%, below expectations for a slight rise of 0.05%.
The cause for the decline was down to falling energy and food prices. Oil prices have declined steeply over the past few months and the fall has now filtered through to consumers who are enjoying lower petrol and diesel prices.
‘The fall came from the December 2013 gas and electricity price rises falling out of the calculation and the continuing drop in motor fuel prices,’ said the ONS.
The core inflation figure, which removes more volatile aspects of the economy, increased to a reading of 1.3% as forecast and was higher from the 1.2% figure seen in November.
The weaker than expected inflation figure has two major implications for the UK economy. On the one hand, wage growth is now likely to rise faster than prices leading to a real wage rise and on the other; it eases pressure on the Bank of England to raise interest rates anytime soon.
Following the release of the report the Pound dropped against the US Dollar and all of its other major peers. The report will raise concerns that the UK economy could be following the Eurozone towards deflation.
With oil prices continuing to weaken, some economists are forecasting that UK inflation could fall even further over the coming months, further easing pressure on the BoE to raise rates.
‘The further 20% or so fall in oil prices since December’s average level looks set to push CPI inflation to a record low of around of 0.2% over the next couple of months,’ said Paul Hollingsworth, an economist at Capital Economics.
The Pound Sterling to US Dollar (GBP/USD) Exchange Rate is trading in the Region of 1.51
