Deflation fears as living costs hit 49-year low

A smaller-than-expected drop in inflation today failed to ease fears that the UK could soon be in the grip of deflation.

Office for National Statistics (ONS) data revealed a fall in the Consumer Prices Index (CPI) to 3 per cent in January from 3.1 per cent in December, which was far lower than experts had predicted.



But the Retail Prices Index (RPI) measure of inflation - used in most wage settlement negotiations in the UK - plunged to its lowest level in nearly 49 years last month, at 0.1 per cent in January from 0.9 per cent in December.



And there are fears that both RPI and CPI could slump into negative territory over the year ahead, sparking fears for the economy.



Economists were surprised that today's fall in official CPI inflation was not greater, having pencilled in a drop to around 2.7%.



The ONS figures suggested the Government's move to reduce VAT from 17.5 per cent to 15 per cent in December brought forward discounting on the high street, impacting the January inflation data.



Alcohol prices also rose across beer, wines and spirits, while consumers were likewise faced with higher costs for recreation and culture - such as toys and games and package holidays.



However, CPI has still fallen significantly from the 5.2 per cent peak last September as the recession tightens its grip and experts said deflation fears have not eased after today's surprising data.



Fuel prices continue to fall from last year's peak, plunging at the fastest pace on record in January, while recently announced gas and electricity bill reductions are also set to pull inflation lower.



Jonathan Loynes at Capital Economics said: "January's UK CPI figures revealed a smaller drop in inflation than expected, but don't preclude a further fall to zero and beyond over the coming months."



"The pressure on key high street goods prices is still strongly downwards and with these pressures set to intensify as consumer spending weakens further, and food and energy price inflation set to fall considerably further, we still expect CPI inflation to turn negative in the late summer/autumn," he added.



The further fall in RPI will be seen as key given the current round of private sector wage negotiations.



Investec economist David Page said wage growth is going to slow "quite markedly" this year, impacted also by high levels of unemployment.



But he said wages were not expected to fall year-on-year even if RPI turns negative.



"It will be very hard for firms to push through wages growth at a lower level than 1 per cent or 2 per cent," he said.



The Bank of England warned in a grim quarterly forecast last week that the UK would only narrowly avoid deflation.



It believes CPI will reach as low as 0.5 per cent this year and remain well below its 2 per cent target until 2012, even with interest rates cut further from their already historic low of 1 per cent.



The threat of deflation is a major concern for the economy, given than it encourages businesses and consumers to defer spending amid expectations that prices will fall further.



Mervyn King, Governor of the Bank, also hinted that policymakers would imminently resort to quantitative easing tactics - where money supply is increased - alongside rate cuts to ward off deflation.



Minutes of the Monetary Policy Committee's February rates meeting are due out tomorrow and may also shed further light on the extent and timing of further rate cuts and any move to adopt "unconventional" tools.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone