Inflation fall boosts the case for keeping rates low

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Britain’s squeezed households have been offered some welcome respite after inflation fell below the Bank of England’s two per cent target for the first time in more than four years.

The Consumer Prices Index (CPI) dipped to 1.9 per cent in January from two per cent in December, prompting experts to herald the start of a long run of below-target inflation which will help ease the burden on stretched family finances.

January’s fall in inflation also boosts the Bank of England’s case for keeping interest rates at record lows of 0.5 per cent.

Economists forecast that inflation will remain under the two per cent target throughout 2014, raising hopes that wage growth will finally overtake rises in the cost of living.

Wage increases remained less than half the rate of inflation, at just 0.9 per cent, in the last set of official figures for the three months to November.

But it is thought that rises in earnings and falling inflation will see real wages increase this year, giving consumers some much-needed spending power.

The drop in inflation marks the first time CPI has fallen below the Bank’s two per cent target since November 2009.

It comes after inflation fell to the threshold in December, ending a lengthy period of stubbornly high inflation.

Britain is now said to be facing a golden age of strong economic growth and low inflation – dubbed the “Goldilocks scenario” by one economist.

The Bank of England last week delivered a sharp upgrade to its growth outlook for 2014, to 3.4 per cent from 2.8 per cent.

But slack in the economy and falling inflation has given it breathing space to keep rates at ultra-low levels.

The Bank extended its pledge to keep rates at historic lows.

Cathy Jamieson MP, Labour’s shadow treasury minister, welcomed the drop in CPI, but cautioned the “cost of living crisis continues”.

“Under David Cameron, working people are now on average £1,600 a year worse off,” she said.