INTEREST rates are predicted to stay low well into 2010, after inflation fell below the government's target of 2 per cent.
The prediction appears to be good news for struggling businesses, mortgage holders and borrowers, but has been described as bad for pensioners relying on savings, who are still facing an inflation-busting rise in the cost of living.
There was also
disturbing news for the government, as one of the indicators – the retail price index (RPI) – was at minus 1.6 per cent, the worst rate of deflation since 1948. If deflation sets in, it will halt growth in the economy and mean a long period of stagnation and falling wages.
The main inflation indicator, the consumer price index (CPI), fell from 2.2 per cent in May to 1.8 per cent in June, the lowest level since September 2007.
Falling food prices in June – particularly for meat, milk and fruit – was the main factor behind the fall, compared with a year earlier when food costs were rising sharply. CPI was also dragged down by a lower increase in furniture prices than seen last year.
There were some rises. Average petrol costs in June also rose 4.4p to 101.6p a litre, although this was lower than the 5.3p jump seen a year earlier when oil prices were heading towards a record $147 a barrel.
Howard Archer, chief UK and European economist at IHS Global Insight, said the inflation rates meant that the Bank of England could not raise interest levels until well into 2010.
"The Bank of England can afford to keep interest rates down at 0.5 per cent well into 2010," he said. "The data also does little to dilute our belief that the Bank of England could very well increase its quantitative easing programme in August, despite its inaction at the July meeting, particularly if economic and bank lending data disappoint over the coming month."
The Bank of England's Monetary Policy Committee (MPC) is likely relieved that CPI is now below target, after an 18-month period in which rocketing energy bills, food costs and petrol prices pushed the benchmark to a record 5.2 per cent last September. However, according to the Bank's own predictions, CPI is likely to fall below 1 per cent later this year, as the impact of recession weakens demand and prices.
But Jonny Steel, a spokesman for
mySupermarket.co.uk, said the current low inflation figures might not properly reflect the pressure families were under.
He pointed out that, even though there has been a recent fall in food prices, overall costs for staple foods were up 21 per cent from 2007. "This means that people are still having to fork out more of their household budget on their basic grocery shopping," he said.
There was also a warning for pensioners whose cost of living is still growing at 2.8 per cent, well above the CPI inflation level, according to the Alliance Trust Research Centre. This was down from 3.2 per cent in May, but the centre, warned that pension levels needed to reflect their actual cost of living.
