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Inflation at four-year low of 1.7%

The prospect of a steady rise in real term wages for the first time since the start of the economic downturn came a step closer today as official figures showed inflation fell to a four-year low of 1.7% last month.

Pay growth has been lagging behind the rise in the cost of living for six years, effectively shrinking workers’ spending power.

But a fall in petrol prices and a moderation in energy price hikes helped the Consumer Prices Index (CPI) measure of inflation fall for the fifth month in a row February, according to the Office for National Statistics (ONS).

Inflation falls to four-year low

Inflation falls to four-year low

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It has not been lower since October 2009, when it was 1.5%.

Official forecasts revealed by George Osborne in last week’s Budget revealed that pay is finally expected to overtake inflation later this year with some experts predicting this to happen by next month.

Ministers will be hoping an end to the squeeze spikes the guns of Labour’s charge that a “cost of living crisis” means ordinary people are yet to feel the benefits of the economic recovery.

Earnings have not increased at a higher rate than inflation since a brief spike in March and April 2010 and have not consistently been improving since 2008.

Latest labour market figures showed annual wage growth in the three months to January was 1.4% but suggest private sector wages have already caught up with inflation, at 1.7%. Ordinary public sector workers rises lagged behind at 0.9%.

Monthly total pay rises – which are more erratic – were measured at 1.7% in December and January, suggesting they may also have already caught up.

Prime Minister David Cameron welcomed the inflation figures while the Chancellor tweeted: “The job is far from done but another sign our economic plan’s working.”

But Labour and the unions pointed out that the squeeze was still under way and said pay packets had effectively stalled at the same level they were a decade ago.

The fall in inflation from 1.9% in January also means it remains below the Bank of England’s 2% target, easing any pressure on rate setters as they seek to maintain low borrowing costs to support the recovery.

A first rise from the historic low of 0.5% is not expected until next year.

Savers will also be helped by lower inflation as the value of their nest eggs has been eaten away by the rock-bottom interest rates.

The latest CPI figure was partly driven down by a fall in petrol prices of 0.8p per litre between January and February this year, compared with a 4p rise for the same period in 2013.

Diesel was also down by 0.8p, compared with a 3.7p increase the year before, the ONS said.

Meanwhile, energy bills saw a combination of prices and cuts, compared with an overall rise for the same period in 2013.

Households were also given a boost by inflation in food and non-alcoholic drinks falling to a near four-year low of 1.8%.

Martin Beck, senior economic adviser to the EY Item Club, said: “There is now a distinct possibility that real wage growth will hit positive territory in April, helping to support household spending.”

Samuel Tombs, of Capital Economics, said lower import prices – helped by a strong pound – together with flat commodities and recovering productivity in the economy meant inflation could fall as low as 1% by the end of the year.

David Kern, chief economist at the British Chambers of Commerce, said: “The current economic environment of low inflation and low interest rates should make it easier for businesses to plan ahead and invest.”

But Chris Williamson, chief economist at Markit, said while the low figure gave the Bank of England greater leeway on interest rates, a sharp rise in pay could fuel fears of inflation rising, resulting in pressure to lift them.

TUC general secretary Frances O’Grady said: “Lower inflation is good news, but this cannot hide the longest cut in real wages since the 1870s. Pay packets are about the same level that they were ten years ago.

“These figures underline just how far we have to go to restore living standards so that ordinary people share in the recovery. Britain needs a pay rise.”

During a visit to Hull, Mr Cameron said: ” We’re seeing unemployment falling, we’re seeing more people getting into work, new businesses being set up.

“Crucially, all the time we’re doing this with low inflation which actually helps people live a better standard of life.”

The Prime Minister added: “We’ve got to stick at it.

“There’s a lot more work to be done – more people to be got back to work.

“But to see that improvement in living standards, it’s good news today that inflation is down.”

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