The graph says it all. Inflation, as measured by the Consumer Prices Index (CPI), hit 2.0% in December 2013, ending the year on target. The last time inflation was on target (actually 1.9%, 0.1% below) was November 2009. The main reason for that was the reduced 15% rate of VAT, which lasted from December 2008 to January 2010, temporarily cutting prices.
The 2% target is one that the Bank of England has forecast to be achieved in each quarterly Inflation Report within a two year timescale. It has made this prediction so often that the markets had begun to regard it as a joke. Mark Carney, the Bank’s recently appointed Governor, is lucky that six months into his reign inflation is at 2.0%. His predecessor, Sir Mervyn King, was condemned to a regular correspondence with the Chancellor of the day explaining why inflation was more than 1% above target.
On-target inflation will also help ease another benchmark-related problem which Mr Carney is facing. His “forward guidance” that interest rates would not be reviewed until the unemployment rate reached 7% is likely to be tested much earlier than the mid-2016 that the Bank had originally expected. The latest unemployment rate (for September – November) was 7.1%, a fall of 0.3% from the previous reading. That makes it a fair bet that 7% is months away, at most. If inflation remains around 2%, Mr Carney will be able to say after his triggered review that there is no need to push up interest rates, simply because unemployment has fallen.
And just as a reminder, next month marks the fifth anniversary of 0.5% base rates…