ANNUAL UK inflation has plunged to 0.5 per cent - its joint-lowest since comparable records began in 1989 - prompting Scottish Chambers of Commerce to declare this should ensure future rises in interest rates are pushed back still further.
Bank of England Governor Mark Carney conceded deflation in the UK was now "possible", but insisted the tools were available to ensure it did not become a problem.
Paul Hollingsworth, UK economist at consultancy Capital Economics, warned, in the wake of yesterday's UK inflation figures from the Office for National Statistics, that "a brief period of deflation is quite possible".
Official figures last week showed the eurozone was in deflationary territory for the first time since October 2009, with consumer prices in December down by 0.2 per cent on the same month of 2013.
In an environment of deflation, key risks include the possibilities that consumers will put off spending and businesses will delay investment in the expectation that prices will fall further in future.
The halving of annual UK consumer prices index (CPI) inflation to 0.5 per cent in December, from one per cent in November, made it necessary for Mr Carney to write an explanatory letter to Chancellor George Osborne. This requirement has been triggered by the fact that annual UK CPI inflation is more than one percentage point below the two per cent target set for the Bank of England by the Treasury.
The annual UK CPI inflation rate in December matched that in May 2000.
The ONS cited the downward impact of falling petrol and diesel prices on the annual inflation rate.
It noted that the average price per litre for petrol and diesel had fallen to 116.8p and 122.9p respectively in December. The ONS added that these prices were each 24.8p per litre below the respective peak averages of 141.6p and 147.7p per litre for petrol and diesel in April 2012.
The ONS also pointed out, in explaining the tumble in annual UK CPI inflation between November and December, that there had been price rises from a number of the main electricity and gas suppliers in December 2013 but no such increases last month.
Mr Hollingsworth said: "Inflation took another big step down in December and the halving in the oil price
since the summer should mean that the UK comes within a whisker of deflation
soon."
But he added that, with the Bank of England's Monetary Policy Committee focused on the medium-term outlook for inflation, the
current weakness of consumer prices might not prevent the MPC from raising interest rates later this year.
UK base rates have been at a record low of 0.5 per cent since March 2009.
Liz Cameron, chief executive of Scottish Chambers of Commerce, said: "Low levels of inflation should...ensure that future rises in interest rates are pushed back still further, with the Bank of England's inflation projections showing that it is likely to remain below target for the remainder of 2015."
Howard Archer, chief UK economist at consultancy IHS Global Insight, highlighted the beneficial impact on hard-pressed consumers' purchasing power from the tumble in inflation.
He said: "[It is} e4xcellent news for consumers' purchasing power, with consumer price inflation falling back substantially to a fourteen-and-a-half year low of 0.5 per cent in December. It is now markedly below annual earnings growth, [which rose] to 1.8 per cent in October."
Annual inflation on the old all-items retail prices index measure dropped from two per cent in November to 1.6 per cent in December, the lowest rate since November 2009.
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