As the UK stumbles forward towards a cliff edge exit from the EU, there was a chink of blue sky visible between the lowering storm clouds, just a chink, mid you. Inflation in the UK has dropped to its lowest level for two years and currently stands at 1.8% (measured on the consumer prices index). This represents a fall of 0.3% over the December 2018 level of 2.1% and is the lowest it has been since January 2017. Inflation hit a five year peak later that year in November of 3.1% and certainly, a disorderly Brexit is expected to push prices higher.
The decline in the CPI value has been attributed to falls in the costs consumers pay for energy and fuel bills according to the Office for National Statistics (ONS). It comes in better than the 2% level that analysts had been predicting. The Bank of England aims to have a low, stable inflation level in the UK economy and targets a level of 2%.
Commenting of the data, ONS’s head of inflation, Mike Hardie, noted: "The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year." ONS stated that petrol prices fell by 2.1% in the measurement window due to declining prices for crude oil. There were also declines in prices in hotels and restaurants and children and women’s clothing costs also declined.
Currently, wages are enjoying a 3.3% wage growth, so working families will see their disposable income increase marginally due to the differential between the wage increase and the inflationary increase – well, theoretically at any rate.
Some analysts believe that a no deal Brexit would cause the Bank of England to cut interest rates in a bid to stimulate the economy. Others believe that the Bank might be forced to significantly increase borrowing costs to protect the value of Sterling from excessive falls. This scenario would be needed since although the international value of Sterling has no appreciable effect on the savings and investment of people at home, raw materials and imports are paid for in Dollars or Euros and would become dearer were Sterling to fall (as expected). In turn, these costs would be passed on to the consumer, stoking inflation. The traditional cure for high inflation is to increase central bank interest rates, of course.