This latest figure shows a reduction from the 2.1% figure recorded in November 2013, and marks the lowest level of inflation seen in the UK since November 2009.
King's policies coming through
The Office of National Statistics attributed much of the fall to food and non-alcoholic beverage prices, and recreational goods and services, although fuel bills have continued to increase.
“Since [BoE Governor] Mark Carney came into power everything seems to be working out for him,” said Iain Stealey, manager of the JPM Strategic Bond Fund. “Growth and confidence are improving while unemployment is falling and inflation is at a four year low. Of course he cannot take all the credit. Monetary policy takes time to flow through so the impacts of the previous policies under Mervyn King are now playing out. Also the UK has been helped by improved sentiment in developed nations both in the US and in our largest trading partner, the eurozone.”
Stealey believes falling inflation will ensure the BoE remains on its forward rate guidance path, a positive for bond investors, which had been coming under pressure following the speed of the decline in the unemployment rate.
“Looking forward there are two things to keep an eye on. If emerging markets follow the improvement in the developed economies this could well result in higher UK inflation. As a country we are price takers of commodity prices and a rise in these will lead to more imported inflation.” There is also the question of wage inflation, said Stealey, adding: “Wages have been stagnant for some time and we really need to see a pickup in these to have the confidence that the recovery is becoming sustainable.”
Carney's forward guidance
Royal London Asset Management economist Ian Kernohan agrees the news suits the BoE’s forward guidance on rates and takes the pressure off any likely rate rises. “The bank will be pleased because it finally hit its 2% target. This underpins our view that even though the economy has picked up and it’s good for real income growth, we’re not expecting any rate rises till well into next year.”
Investors should be sticking with risk assets, in Kernohan’s view. “Risk assets have re-priced a bit but if you look at the combination of growth, low inflation and low interest rates, that’s a pro-risk background.”
Edward Smith, global strategist at Canaccord Genuity Wealth Management, noted the long-term projection for inflation into 2016 is 2.1%, which fits with his firm’s models. “2% inflation in a country with pretty meagre wage growth is good. We don’t want inflation too far above that because of the knock on effect of rising rates on the consumer.
“This will provide some comfort for bond investors,” said Smith. “We believe equity markets have got ahead of themselves and predict in the next six months they will take a breather to allow earnings to catch up. Around target inflation is probably good for equity markets, although UK domestic focused stocks are perhaps coming to the end of their outperformance.”
