Inflation finally hits government target

The Consumer Prices Index eased to 2% in December, down from 2.1% the month before. This is the first time that inflation has hit the government target of 2% since November 2009.

Whilst the change is a mere one tenth of a percentage point, the fall to 2% is in many ways symbolic and will provide confidence as the economy looks to continue on its growth path.

Economists believe that the fall will ease pressure on the Bank of England to raise interest rates following the recent recovery in the economy. Some also expect inflation to stay close to the 2% target for some time to come.

The governor of the Bank of England, Mark Carney, has indicated that the Bank will not even consider raising interest rates until the unemployment rate falls below 7%. It is currently 7.4% but coming down fairly fast.

The latest 2% inflation rate is however still ahead of average earnings growth, which is currently 0.8% excluding bonuses. However, some economists believe the squeeze on households is likely to end later in 2014 and predict that average pay rises will then start to exceed inflation.

So more positive news at the start of 2014. The upshot is that there are several more savings accounts that now beat inflation, albeit on a fixed rate basis. And of course, equities generally are doing better as well.

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