U.K. inflation unexpectedly slowed in December, cooling to the Bank of England’s 2 percent target for the first time in more than four years.
Consumer-price growth eased from 2.1 percent in November, the Office for National Statistics said today in London. The median of 32 estimates in a Bloomberg News survey was for it to remain unchanged. Downward pressure from food prices including fruit and meat offset an upward effect from electricity, gas and petrol costs.
Cooling inflation may allow BOE Governor Mark Carney to keep interest rates at a record low for longer to help the recovery build momentum. The central bank forecast in November that inflation would average 2.2 percent in the fourth quarter. The BOE, which said it won’t consider increasing the key rate from 0.5 percent until unemployment falls to 7 percent, will publish new forecasts on Feb. 12.
“The return to the target will allow the Bank of England to promote with renewed confidence their message that rates are on hold for a long time to come in the face of the unemployment rate falling faster than expected,” said Sam Hill, an economist at RBC Capital Markets in London.
The pound pared a gain versus the dollar after the data and was 0.2 percent higher at $1.6408 at 10:58 a.m. London time. It strengthened as much as 0.4 percent before the report.
Headline inflation had been above the BOE’s goal every month since December 2009. It was at 1.9 percent in November 2009 and was last exactly at the 2 percent target in April 2006.
“It’s welcome news that inflation is down and on target,” Prime Minister David Cameron said in a post on Twitter. “As the economy grows and jobs are created this means more security,” he wrote.
While inflation is cooling, subdued wage growth means households remain under pressure. As the U.K. economy strengthens, opposition Labour Party leader Ed Miliband is focusing on the cost of living before the election in May 2015.
“This small fall in the inflation rate is welcome, but with prices still rising more than twice as fast as wages the cost-of-living crisis continues,” Catherine McKinnell, a Labour economy spokeswoman, said in an e-mail.
From the previous month, consumer prices rose 0.4 percent in December, today’s report showed. Economists predict inflation will cool to an average 2.2 percent this year from 2.6 percent in 2013, according to a Bloomberg survey.
Core annual inflation slowed to 1.7 percent in December from 1.8 percent, the ONS said.
“Inflation looks set to ease gradually,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “This will help real wages to finally recover and should enable the Monetary Policy Committee to leave interest rates on hold this year even if unemployment falls below the 7 percent threshold used for its forward guidance.”
Last year, energy companies including Centrica Plc, SSE Plc, RWE Npower Plc and Scottish Power announced price increases. Some subsequently said they will reduce prices after the government announced it will cut levies on companies to ease the cost of living. The ONS said some of those changes will be captured in the inflation data in early 2014.
Retail-price inflation, a measure used in wage negotiations and as a basis for the inflation-linked bond market, accelerated to 2.7 percent from 2.6 percent. Inflation by that measure excluding mortgage-interest costs was 2.8 percent.
In a separate report, the statistics office said factory-gate prices were unchanged in December from November and up 1 percent compared with a year earlier. Input prices increased 0.1 percent on the month and fell 1.2 percent from a year earlier. That’s the biggest annual decline since September 2012.
The ONS also reported today that annual house-price growth slowed to 5.4 percent in November from 5.5 percent in October. That’s the first slowdown since April 2013.
Growth in property prices continued to be led by London, where values were up 11.6 percent in November. Excluding London and the southeast, average prices in the U.K. rose an annual 3.1 percent.