Inflation rate sinks to record low

Economists said the remarkably low level of inflation, which equals the record set in May 2000, meant that an interest rate increase is now far less likely in the coming months and may not come until next year.

The record low of the Consumer Prices Index will also raise the spectre of falling prices — or deflation — which some commentators fear could damage the recovery.

But it will be hailed in Downing Street as further evidence that the Coalition’s economic strategy is delivering the “feel good” factor to voters just in time for the election on May 7.

Inflation is now rising at less than a third of the 1.6 per cent rate at which wages rose in the three months to October, according to the latest government statistics.

Chancellor George Osborne said: “Today we have welcome news that 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.”

But 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 £1,600 a year worse off under this government.”

Oil prices have more than halved since last summer with a barrel of Brent crude down to a near six-year low of around $46 this morning.

German-owned E.ON broke ranks with the other major suppliers and said it is cutting its gas prices by 3.5 per cent, a move expected to be followed by its rivals.

Ann Robinson, director of consumer policy at comparison website uSwitch.com, said: “With wholesale energy costs continuing to drop, a cut to the standard tariff by a big six supplier is well overdue. Today’s announcement is to be applauded and the other major suppliers must now do the right thing for consumers and follow in E.ON’s footsteps.

“However, given the huge reduction in wholesale prices — which make up around half of energy bills — we believe standard tariffs can and should be cut even further. The question is — is the prospect of Labour’s price freeze to blame for the failure of the big six to cut standard prices until now?”

The falling oil price is also expected to feed through to shop prices as the cost of distribution and manufacturing falls and supermarkets battle to win consumers.

James Brown, partner at the London office of pricing experts Simon-Kucher & Partners, said: “As the discount retailers continue to go from strength to strength, we expect consumers to see further benefits as the major supermarkets continue cutting prices.

“Tesco recently announced price cuts across hundreds of items, as part of their new chief executive’s, Dave Lewis, attempt to revive Britain’s largest supermarket group — indicating no imminent let up in the ongoing supermarket price war.”

There were also further signs that the rampant house price inflation of last year is also coming under control.

The average cost of a London property slipped £3,000 in November to £501,000 — the third consecutive fall.

Scott Corfe, head of UK Macroeconomics at City forecasters CEBR, said: “Conventional wisdom is that deflation is a bad thing which leads to a negative economic spiral as households stop making purchases in anticipation of future price falls.

"But this hardly applies when the main driver of deflation, as would be the case in the UK, is falling essentials prices; households won’t stop purchasing food because prices might be lower in a month’s time.”