Festive sales reduce inflation

Cut-throat Christmas competition among retailers desperate to drum up trade is likely to have triggered the steepest monthly fall in inflation for more than three years.

Analysts predict the Bank of England's official Consumer Prices Index benchmark, which stood at 4.8 per cent in November, will tumble to 4.2 per cent this week. This would be the biggest drop over a single month since October 2008.

According to the British Retail Consortium, the rate of inflation for non-food items hit a two-year low of 0.3 per cent last month as retailers slashed prices for electrical goods, clothes and footwear.

The Bank is expecting an even bigger fall in the cost of living in January when the impact of the Chancellor's VAT hike to 20 per cent a year ago drops out of the official figures.