Bank breathes sigh of relief over inflation figures

The Bank of England's inflation rate target is 2.0%. Photo: Yui Mok/PA Wire

For the first time in four years inflation has fallen to the Bank of England's target of two percent.

Stubbornly high inflation (combined with low or non-existent pay increases) has relentlessly eroded living standards in Britain so this fall is welcome.

Over those four years, inflation has variously been pushed up by oil prices, energy bills, tuition fees, food prices and countless other factors - on many of which the Bank protested it had no influence.

Now its governor, Mark Carney, can breathe a sigh of relief that there's no immediate pressure to change his policy of keeping interest rates at a record low of 0.5%. For the time being he can carry on with his policy of forward guidance, aimed at giving borrowers confidence that interest rates won't rise soon.

The outlook for inflation is pretty benign, too. Producer prices - what the factories that make things charge - are also increasing very slowly, rising only 1% on a year ago, while the prices of the materials they use actually fell.

Mark Carney has kept interest rates at a record low of 0.5%. Credit: Dylan Martinez/PA Wire

The latest rises in energy bills haven't made much of a mark yet. In fact, as companies pass on the cuts in energy taxes, bills may actually fall.

As we've reported several times already this year, pay rises may finally outpace inflation sometime this summer and the Treasury responded to the news by saying it is "another sign that the government's long-term economic plan is working. But the job is not done and times remain tough for many people."

Indeed so. It will take longer still before we feel significantly better off - a point Labour is highlighting again this morning.

Catherine McKinnell MP, Labour’s Shadow Economic Secretary to the Treasury, says:“This small fall in the inflation rate is welcome, but with prices still rising more than twice as fast as wages, the cost-of-living crisis continues. After three damaging years of flatlining, working people are on average £1,600 a year worse off under the Tories.”

The political battles will continue to rage, but inflation is providing a calm backdrop for now.