Key questions about the fall in inflation

Inflation fell to 0.5% in December Credit: PA Wire

Official figures have shown inflation fell to 0.5% in December from 1% the previous month but what does that mean for the UK.

  • Why is inflation so low?

The key drivers are falls in fuel and food costs. These are caused by tumbling oil prices, which are at their lowest level for nearly six years, and fierce supermarket competition, which has resulted in negative food and drink inflation for six months.

  • Is it good news?

Ultra-low inflation means the cost of living is barely rising, so wages give households more spending power than they would have. Experts say this should spur spending, boosting the economy and cheering voters ahead of the general election in May.

  • What might it mean for interest rates?

Policymakers tackle rising inflation by raising interest rates, so low inflation should push back the timing of any hike in rates, which have been held at 0.5% for nearly six years - easing the strain on mortgage borrowers but spelling more pain for savers.

  • Is there any downside to falling inflation?

Negative inflation, or deflation, could potentially lead to a spiral of falling prices in which consumers postpone purchases and firms cancel investment. If wages then fall repayments on loans such as mortgages would become less affordable.

  • What might happen now?

Economists predict inflation will continue to fall to new record lows of around 0.2% and some say there is an outside chance of a brief period of deflation, though the path is hard to predict given the volatile nature of oil prices.