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London - British consumer price inflation plunged to its lowest level since May 2000 last month and looks set to fall further, easing a squeeze on consumers and leaving the Bank of England (BoE) under no pressure to raise interest rates soon.
Reflecting a slide in global oil prices, the rate of consumer price inflation halved to an annual 0.5% in December from 1.0% in November, the Office for National Statistics said on Tuesday.
Economists taking part in a Reuters poll had expected inflation to fall to 0.7%. Sterling weakened after the data and was close its lowest level against the dollar in 18 months.
Weak price growth will be a relief for British consumers as a boost to their spending power after years of weak wage growth.
Most economists, meanwhile, say Britain, where consumer spending remains strong, faces less danger of deflation than the eurozone, where falling prices have sparked fears of a Japan-style economic stagnation.
Surveys of Britons' inflation expectations - the kind of thing that hints at whether purchasing will be delayed - show that they expect inflation to rise and to be fairly close to the BoE's 2% target in coming years.
"This acts like a giant tax cut for the economy, putting more money in the pockets of hard pressed-consumers," said Danny Alexander, the deputy finance minister.
After years of prices rising faster than wages, the data may help the government of Prime Minister David Cameron to combat criticism from the opposition Labour Party that it has presided over a "cost of living crisis", one of the big political themes ahead of a May 7 national election.
Weaker inflation to come
Crude oil prices fell to their lowest level in nearly six years on Tuesday, pointing to further falls in inflation
"We doubt that inflation has reached its low point yet," said Paul Hollingsworth, economist at Capital Economics, adding that he expected inflation to hit 0.2% in the coming months and could even dip into negative territory.
"That said, with the Bank of England focused on the medium term outlook for inflation, its present weakness is likely to only act as a speed limit rather than an outright roadblock to raising interest rates."
The ONS said falling petrol prices and lower electricity and gas bills compared with a year ago were the biggest factors pushing down inflation in December.
BoE Governor Mark Carney last month described falling oil prices as "unambiguously net positive" for Britain's economy.
In a formal explanation to finance minister George Osborne next month, the BoE is likely to say that the fall in oil prices will only have a short-run impact on inflation and that its concern is to focus on the outlook for inflation over a two- to three-year horizon.
In November, the BoE predicted CPI would hit its target of 2% only towards the end of 2017. Financial markets are expecting the BoE to start raising rates only in early 2016.
Food prices, which have been pushed down by a supermarket price war and lower commodity prices, fell 1.9% - their biggest fall since June 2002.
The ONS said prices at the factory gate fell 0.8% in the year to December, the biggest decline since September 2009 and a steeper fall than forecast by economists.
In December alone, crude oil prices paid by manufacturers fell by 13.2% - the sharpest drop since December 2008.
