Inflation falls to 0.5% - the lowest since 2000

Rates of inflation are at their lowest level since 2000. Picture: PA

The Consumer Price Index (CPI) measure of inflation fell to 0.5 per cent in December, equal to the rate in May 2000, which has not been lower since CPI records began in 1989, official figures showed.

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But the drop in inflation has led Chancellor George Osborne to try to dispel fears that the UK is following the Eurozone into a damaging cycle of deflation.

His assurances in a speech today come after economists said the ongoing plunge in the oil price meant it was likely to fall further and a brief period of negative inflation or deflation was “not entirely out of the question”.

The plunge in CPI to 0.5 per cent will trigger a letter of explanation from Bank of England governor Mark Carney to Mr Osborne because it is more than 1 per cent off the bank’s 2 per cent target. While it will be welcomed for boosting household budgets and lifting the real-term value of wages, there will be concern about a period of falling prices.

In a speech today, Mr Osborne will say: “The low inflation we see here in the UK is much more welcome than in the Eurozone where inflation is now negative.”

He will add: “In the UK our system is well equipped to deal with negative inflation shocks just as it dealt with the surge in commodity prices in 2010 and 2011.

“A few months of very low or even negative inflation, driven mainly by external factors, does not in and of itself mean that we run the risk of deflation.”

Prime Minister David Cameron tweeted: “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: “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 £1,600 a year worse off under this government.”

Yesterday’s figures from the Office for National Statistics (ONS) showed inflation has been dragged down by 0.6 per cent in December by sliding fuel and food prices combined.

Flat household and electricity tariffs over the month – compared to a period last year when they rose sharply – made a major contribution to the drop in CPI. The fall means pay rises should pull further ahead of inflation. Record low inflation also pushes any need to raise interest rates further into the future.

Bank of England sources said they expected CPI to remain remain below 1 per cent for months to come.

The ONS figures showed food and non-alcoholic beverages were 1.7 per cent cheaper in December than last year, the sixth month in a row of year-on-year declines. These have been driven by a price war between major supermarkets under pressure from Aldi and Lidl.

Motor fuels fell 10.5 per cent year-on-year, the largest fall since July 2009. The price of a litre of petrol fell by 13.6p between December 2013 and last month, with diesel 15p lower. Over the month, a litre of petrol fell by 6.1p and diesel 4.8p.

Paul Hollingsworth, of consultancy Capital Economics, said inflation was likely to fall further and a brief period of deflation was “not entirely out of the question”.

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