Synopsis: Annual CPI inflation fell unexpectedly to a 12 year low of just 1.0% in November.

Inflation on the CPI measure has stepped down by 0.3% to 1.0% in November. The November inflation numbers from the Office for National Statistics (ONS) more than reversed the previous month’s 0.1% increase and were well below market expectations of about 1.2%. The index showed prices fell by 0.3% over the month, leaving them at less than 0.1% above their April 2014 level.
The CPI/RPI gap was unchanged this month, with the RPI also dropping 0.3% on an annual basis to 2.0%. Over the month, the RPI declined by 0.2%.
The CPI fall from October to November was driven by five main factors according to the ONS:
• Transport: Overall prices fell by 1.2% between October and November this year, compared with a fall of 0.5% between the same two months a year ago. Average petrol prices fell by 3.0p per litre between October and November this year compared with a fall of 1.7p a year ago. Diesel prices moved in a similar fashion. Air fares fell more than normal between October and November.
• Recreation & culture: Overall prices fell by 0.3% between October and November 2014, compared with a rise of 0.4% between the same two months a year ago. The largest downward contributions came from price movements for computer equipment – notably PC peripherals such as printers – and games, toys and hobbies.
• Alcohol & tobacco: Overall prices fell by 1.2% this year compared with a fall of 0.1% a year ago. The effects came from price movements for spirits – principally whisky – and tobacco.
• Miscellaneous goods & services: Overall prices fell by 0.1% this year but rose by 0.3% a year ago with the downward effect coming from personal care products.

• Food and non-alcoholic beverages: Overall prices fell this year but were little changed a year ago.
The ONS says that there were ‘no notable upward contributions to the change in the CPI 12-month rate.’ Indeed, a look at the twelve main divisions within the CPI shows that four (food & non-alcoholic beverages, clothing & footwear, transport and miscellaneous goods & services) registered year-on-year falls and another three (furniture, household equipment and routine maintenance, communication and recreation & culture) recorded rises of no more than 0.5%.

This drop was sharper than expected and now makes it almost certain that in the next month or two the governor of the Bank of England will be writing to the Chancellor to explain why inflation is more than 1% below target. Whether that will delay the first increase rate pencilled in for 2015 remains to be seen.

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