Falling inflation could mean rock bottom interest rates remain

Falling inflation could mean rock bottom interest rates remainPrice inflation as measured by the Consumer Prices Index (CPI) has fallen by -0.1% in the year to October.

The Retail Prices Index (RPI) measure of price inflation also fell in October, to 0.7% from 0.8% the previous month.

These figures represent the lowest level of RPI since November 2009 and the first time the CPI measure of inflation has fallen in two consecutive months since this measure was created in 1997.

Falling food, alcohol and tobacco prices contributed to the lower price inflation figures, more than offsetting a rise in the price of clothing.

Commenting on the price inflation figures, Maike Currie, associate investment director at Fidelity International said:

“British households will continue to reap the rewards of a lower cost of living as UK inflation remains in deflationary territory, unchanged at -0.1% in October from September’s similar figure. 

“This is the third time this year – and since 1960 – that inflation has been negative.

“To date Mark Carney has had to pen four open letters to Chancellor George Osborne explaining why UK inflation is so far below the Bank of England’s target rate of 2%.

“In his latest letter, Carney said he expected inflation to remain below the 1%-mark until the second half of 2016.

“For now the UK’s weak inflation rate is largely due to external factors – persistently weak global demand and a strong pound pushing down commodity prices.

“However, as the Bank of England’s chief economist Andy Haldane points out, over time these pressures should wane, and the key factor that will determine the future path of inflation will be domestic costs, specifically labour costs.

“But the UK labour market has been an unpredictable beast in recent years with wage growth remaining lacklustre despite the strong rise in jobs.

“One reason why wages are staying low could be because technology has made it easier and cheaper to substitute man for machine. This suggest much larger structural issues are keeping inflation at bay.

“The Bank of England’s suggestion that interest rates may stay at rock bottom throughout next year may just be the start of it.

“Interest rates could stay low for the foreseeable future if low inflation turns out to be less cyclical than structural.In a low interest-rate environment, investors continue to view equity income as a safe haven and a rare source of yield.”

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