Why has the recently announced inflation figure fallen so much and what does it mean for interest rates now?
The usual measure of inflation for monetary policy is the Consumer Prices Index (CPI) which fell the most in 16 years, as announced in mid-November. Whereas the previous month’s figure had shown a reading of 5.2%, October’s figure dropped significantly to 4.5%. The recent falls in the oil price (currently below per barrel, compared to its record high of earlier in the year) has fed through to petrol prices, and the cost of food has also fallen. Another aggressive faller was transport costs. Even core inflation, which strips out fuel and food, also fell to 1.9% in October from the previous month’s figure of 2.2%. In addition, the Retail Prices Index (RPI), which includes housing costs, also fell from 5% to 4.2%. This gives the Bank of England more leeway to cut interest rates further at its December meeting, along with weakening growth figures, in an attempt to bolster the economy. The most recent cut from 4.5% to 3% is currently expected by most economists to be followed by a 0.5% cut
