Inflation at lowest level since 2010

Tuesday 14th February 2012

UK inflation has fallen to a 14-month low according to new figures from the Bank of England.

As it prepares to publish an update to its quarterly economic forecasts on Wednesday, the decline to 3.6 percent - its lowest annual rate in more than a year - will reassure the Bank of England.

However, Bank governor Mervyn King will still have to write a public letter to the Treasury explaining why inflation has remained well above its 2% target for the past two years.

The slowdown in inflation in January was partly driven by the increase of VAT to 20% from 17.5% in January 2011, which now has no impact on the 12-month figures.

Consumer prices fell 0.5% from December, according to the report. Prices for food and non-alcoholic drink declined 0.4%, while costs for clothing and shoes fell 4.9%.

Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.6% in January from 3% in December 2011.

Retail-price inflation, a measure used in wage negotiations, eased to 3.9 percent from 4.8%, the weakest since February 2010. The retail-price index excluding mortgage-interest payments fell to 4%, down from 5%.

A stabilisation in petrol prices also pushed down the rate of inflation in the transport sector to its lowest since October 2009, but there remained upward pressure from financial services, clothing and footwear and air travel.

Many economists predict the Bank of England will continue to predict that CPI will fall below the government’s 2% percent target by the end of 2012, and remain below target in two years' time, as weak growth and an end to energy price rises take effect.

Economists also believe that lower inflation may also lift consumer demand, which has been a major drag on Britain's sluggish economy, at a time when it is also struggling with the fallout from the euro zone debt crisis and the government's austerity programme.

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