Inflation Drops to a Three-Year Low

In December 2019, the cost of living fell to its lowest in three years due primarily to discounts on hotel rooms and women’s clothing. The dip in UK inflation has raised hopes of a cut in interest rates.

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The Office for National Statistics (ONS) confirmed that last month the Consumer Price Index had settled at 1.3 per cent, a reduction from November’s 1.5 per cent. Inflation was last lower in November 2016.

The figure of 1.3 was below the 1.5 forecast and is likely to stimulate votes for an interest rate cut after the Bank of England’s governor Mark Carney hinted at the possibility to kick-start the economy. With the Monetary Policy Committee (MPC) raising concerns over the recent weak data, the fall in inflation is likely to increase calls for a rate cut.

Discounts in Hotels and Clothing

The hotel sector saw the biggest downturn contributing to falling inflation. This was because prices for overnight stays dived 7.5 per cent from November to December, against a rise in 2018 over the same period.

The cost of women’s clothing also fell, as many items were discounted. Retailers slashed women’s clothing prior to Christmas. In December, 15.2 per cent of fashion items were on sale, compared with 10.9 per cent during December 2018.

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Extreme discounting was notably focused around the High Street, with retailers cutting prices on cardigans, jackets, skirts and formal trousers.

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This article investigates the prospect of an interest rate cut.

Other Sectors

The food inflation rate slowed down too as the cost of jam, sugar, confectionery and chocolate dipped 2.1 per cent, albeit offset in part by pricey vegetables.

In addition, the cost of alcohol fell, spurred by 4.2 per cent lower prices on beer and a 3.9 per cent drop in spirits prices.

Reductions in the sectors above offset growing inflation for electrical appliances, mobile phone chargers and furniture during December.

The Retail Price Index, an alternative measure of inflation, reached 2.2 per cent during December, unchanged from the same number in November.

The Consumer Price Index, which includes the housing costs of owner-occupiers – the ONS’s preferred gauge of inflation – reached 1.4 per cent during December, reduced from 1.5 per cent in November.

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