British inflation, the lowest since 2000

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British inflation, the lowest since 2000

Inflation in consumer prices in Britain fell in December to its lowest level since May 2000 and the trend suggest that this will continue to go lower, which will ease the pressure on consumers and give space to the Bank of England to raise interest rates soon.

British inflation is at its lowest for 14 years. The rate of inflation in consumer prices fell by half, to 0.5% in December from 1% in November, reflecting the drop in global oil prices. Economists polled by Reuters projected that inflation will decelerate to 0.7% in December. The pound weakened after the data and was trading near its lowest level against the dollar in 18 months.

The weak increase in prices will be a relief for British consumers and boost their purchasing power after years of weakness in the growth of wages.

Meanwhile, most economists argue that Britain, where consumer spending remains strong, face less danger of deflation that is facing the euro zone, where the fall in prices has sparked fears of a Japanese-style economic stagnation.

“This acts as a giant tax cut for the economy, putting more money in the pockets of consumers who feel pressured,” said British Finance Deputy, Danny Alexander.

This turnaround stems from the decline in fuel prices, air travel and cars, as well as typical products of the holiday seasons. In addition, the drop in inflation was linked to a decline in food prices, which recorded in November had fallen by 1.7%, while prices of automotive fuels fell 5.9%.

If many have seen this as “an early Christmas present” for consumers, some investors are concerned about a possible slowdown in the British economy if people decide to delay their purchases waiting for prices to fall further.

Despite this strong drop in inflation, the Bank of England believes there is no need to do more to stimulate the economy. “This seemed wildly implausible just six months ago and I have my doubts even now,” said David Miles, director of that institution. In the article, he explains that if food and fuel are cheaper, then British households can better manage their debts.

Miles, who ends his term at the Bank of England in August, went on to explain that “there is no great urgency to begin the process of moving monetary policy to a more normal environment.”

Given the constant rumours of deflation on the Internet, the Financial Times columnist Chris Giles suggests that this is a reverse of cliché and that “one can say that this is a time for complacency.” In addition to Giles, concern about the decline in inflation is misplaced, since domestic demand is strong, with a nominal GDP in the third quarter 5.1% higher than a year earlier and GDP up to 3% actual.

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