The inflation rate in the UK fell to 0.5% during December and is now the joint lowest rate ever recorded, according to official figures.
Inflation (as measured by the Consumer Prices Index), dropped from 1% in November down to its lowest level since May 2000. Cheaper fuel prices were a large contributory factor in the fall.
Mark Carney, the Governor of the Bank of England, has commented that low inflation could mean that we keep lower interest rates for some time to come, although he predicts that rates will increase incrementally over the next few years.
When inflation drops down below 1%, Mr Carney is obliged to write a letter of explanation to the Chancellor, George Osborne. This is required because the CPI rate now exceeds one percentage point from the Bank of England’s stated target rate of 2%
The ONS (The Office for National Statistics), has released data showing that the RPI (Retail Prices Index) measure of inflation dropped to 1.6%, down from 2%.
The ONS noted that this drop was the result of both falling fuel prices and also due to the fact that rises in the price of electricity and gas in December 2013 no longer formed part of the equation.
Many economists predict that another fall is likely in the near future, leaving the UK in a similar situation to that currently ongoing in the Eurozone, where deflation is causing significant problems for policymakers.
Mr Carney believes maintaining interest rates at a low level over a longer time period could help to mitigate the effects of low inflation for longer. He is keen to emphasise though, that interest rates will inevitably rise, albeit it gently, over the course of the next few years.