U.K. inflation has slowed to its equal-lowest rate on record, an annual 0.5% in December, amid a drop in oil prices, the Office of National Statistics said Tuesday.
While the drop will force Bank of England Governor Mark Carney to write a letter to Treasury chief George Osborne, explaining why inflation is over a percentage point below the bank’s 2% target, some economists say the decline is good news for the British economy.
“The fall in the oil price should provide a significant boost to households’ discretionary spending power,” according to Paul Hollingsworth of Capital Economics.
A sustained drop in consumer prices can be a concern if it encourages consumers to hold off big purchases in hopes of better deals later. The eurozone is facing such a danger and its central bank is considering a big stimulus measure to head off the probability.
But the U.K. economy is stronger than that of the eurozone, suggesting consumers are less likely to put off spending.
“The risk that low inflation becomes ingrained looks small,” said Hollingsworth. “So rather than being a risk to the recovery, low inflation is another reason to think that GDP growth will be strong again this year.”
Hollingsworth said inflation in the U.K. is likely to fall further – to 0.2% in February – and that an outright drop in prices was possible.
December’s figure equals the 0.5% rate in May 2000.