Shock fall in price inflation

The cost of buying goods and services went up last year, but not as quickly as it going up previously.

According to the latest price inflation figures published by the Office for National Statistics (ONS), the Consumer Prices Index (CPI) fell from 1% to 0.5% in the year to December 2014.

This represents the lowest rate of price inflation since May 2000.

Economists expected a fall in CPI today, but to around 0.7%. Cheaper fuel prices are a big contributor to this lower price inflation.

The Retail Prices Index (RPI) measure of price inflation also fell in December, from 2% to 1.6%.

Unlike CPI, RPI includes a measure of housing costs including mortgage interest.

As a result of CPI falling to 0.5%, Bank of England governor Mark Carney will need to write an official letter of explanation to the chancellor George Osborne.

However, Osborne’s initial reaction to the news (keeping mind he would have been briefed yesterday, ahead of the publication this morning) seems quite positive, with these tweets:

Inflation is 0.5%- lowest level in modern times.Welcome news with family budgets going further& economic recovery starting to be widely felt

— George Osborne (@George_Osborne) January 13, 2015

We will always remain vigilant that we have lower inflation for right reasons & today is yet further proof #LongTermEconomicPlan is working

— George Osborne (@George_Osborne) January 13, 2015

Investment markets continue to expect inflation to average 3% over the coming years, so with inflation currently at 0.5% this might suggest we are in for a period of much higher price inflation in the future.

In any case, it is important to review the inflation expectations made within Financial Plans to ensure these remain realistic. Inflation is an important assumption within Financial Plans and something which should be reviewed on a regular basis, to keep cashflow forecasts on track.

What falling price inflation is likely to mean is interest rates will remain on hold for longer. We continue to expect interest rates to stay at 0.5% for the rest of this year, despite market expectations for a modest rise.

Do get in touch if you would like to discuss what these latest price inflation figures mean for your long-term Financial Plans.

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