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Inflation falls below 2% for first time in four years
10:53am Tuesday 18th February 2014 in Business: Personal Finance
INFLATION has fallen below the Bank of England's 2% target for the first time in more than four years.
The Consumer Prices Index (CPI) fell for the seventh month in a row in January, to 1.9% from 2% in December, according to the Office for National Statistics (ONS).
Experts believe the decline heralds the start of a run of below-target inflation in what will come as welcome respite for cash-strapped households.
It is hoped that inflation will continue to fall during 2014, leaving it on course to be overtaken by wage growth, which has been lagging behind rises in the cost of living.
The drop in inflation marks the first time CPI has fallen below the Bank's 2% target since November 2009.
It comes after inflation fell to the threshold in December, ending a lengthy period of stubbornly high inflation.
Below-target inflation will give the Bank of England breathing space to keep interest rates at record lows of 0.5%.
Last week it delivered a sharp upgrade to its growth outlook for 2014, to 3.4% from 2.8%.
But slack in the economy and falling inflation allowed it to extend its pledge to keep rates at ultra-low levels, despite abandoning its guidance linked to unemployment as a result of sharp improvements in UK joblessness.
It replaced the old guidance with policy based on a more complex framework linking rates to the output gap in the economy as measured by a series of 18 indicators - dubbed "fuzzy guidance".
Prime Minister David Cameron said in a message on Twitter: "Today's fall in inflation is more evidence our long-term economic plan is working. We want to ensure a secure future for hard-working people."
The ONS said energy prices had little impact on the rate of inflation last month, as the recent round of price hikes were cancelled out by subsequent reductions in tariffs due to the Government's move to reduce environmental levies on bills.
Gas and electricity providers have been scaling back their winter bill rises to take account of the green levy shake-up, with British Gas lowering its recent tariff increase by 3.2%.
The biggest factor in driving down inflation was a fall in recreation and culture prices, with DVD films costing less and entrance fees slashed for a range of attractions.
The traditional post-Christmas rise in whisky prices was also lower than a year earlier, which saw the annual rate of inflation for alcoholic drinks and tobacco fall to 4.5% - its lowest level for nearly four years.
But there was little impact from last month's clearance sales on the high street, despite recent figures from the British Retail Consortium showing shop prices falling last month at their fastest rate since its records began - down by 1% against a 0.8% drop in December.
The ONS said one of the main notable drops in retail prices came from furniture and household goods, where discounts were ramped up on a year earlier.
A separate measure of inflation, the Retail Prices Index (RPI), which includes housing costs, rose to 2.8% in January from 2.7% in December.
A new measure of inflation, CPIH, which also includes housing costs, fell to 1.8% from 1.9% in December.
Another new measure, RPIJ, rose to 2.1% in January from 2% the previous month.
Chief Secretary to the Treasury Danny Alexander said: "Inflation falling below 2% for the first time since November 2009 is further evidence that our long-term economic plan is working.
"Controlling inflation and rebuilding our economy are the only sustainable ways to secure living standards for the future."
David Kern, chief economist at the British Chambers of Commerce, said the fall in inflation was good news for businesses and consumers and will strengthen the case that an early rise in interest rates is "neither necessary nor likely".
He said: "An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises.
"The economy still faces many challenges, and every effort must be made to bolster the recovery.
"But since our current forecast suggests that inflation will remain at around the 2% target, it is now up to the Chancellor to use next month's Budget to implement measures to boost enterprise and wealth creation."
The pound, which has reached a four-year high against the US dollar in recent days, fell back amid expectations that the weaker inflation figure will enable the Bank of England to keep rates at their record low for longer.
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