Inflation has tumbled to its lowest level on record as sliding food and petrol prices plus subdued utility bills helped provide what was described as a “giant tax cut for the economy”.
The Consumer Price Index (CPI) measure of inflation fell to 0.5% in December, equal to the rate in May 2000 which has not been lower since CPI records began in 1989, official figures showed.
Economists said that the continued plunge in the oil price meant it was likely to fall further and that brief period of negative inflation was “not entirely out of the question”.
The plunge in CPI to below 1% will trigger a letter of explanation from Bank of England governor Mark Carney to Chancellor George Osborne because it is more than 1% off the Bank’s 2% target.
While it be welcomed for boosting household budgets and lifting the real terms value of wages, there will be concern about the spectre of a period of falling prices.
The sharpness of the decline brings the UK uncomfortably close to the scenario in the eurozone where there are fears of a damaging deflationary spiral after inflation fell to minus 0.2%.
But the boost to households should lift the economy by stimulating consumer spending as well as providing a tonic to the Coalition ahead of the general election in May.
Mr Osborne said: “Inflation is at its lowest level in modern times. We have family budgets going further and the economic recovery starting to be widely felt.
“We will always remain vigilant that we have lower inflation for the right reasons. And today is yet further proof our long term plan is working.”
Prime Minister David Cameron wrote on Twitter: “The fall in £inflation is good news for families. Our long term economic plan is on track and helping hardworking taxpayers.”
Danny Alexander, Chief Secretary to the Treasury, said: “These figures show that the falling price of oil is working its way into lower prices.
“This acts like a giant tax cut for the economy, putting more money in the pockets of hard pressed consumers.”
Shadow Treasury minister Shabana Mahmood said: “Plummeting global oil prices are the reason why the rate of inflation is falling here in Britain.
“But wages continue to be sluggish and the squeeze on living standards since 2010 means working people are £1600 a year worse off under this government.”
Today’s figures from the Office for National Statistics (ONS) showed inflation has been dragged down by sliding fuel and food prices, which combined pulled it lower by 0.6% in December.
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