Inflation falls sharply - but less than expected

By Holly Williams, Press Association

Tuesday, 20 January 2009

Share
Close
- Digg
- del.icio.us
- Facebook
- Reddit
- Google
- Stumble Upon
- Fark
- Newsvine
Print
Email

Heavy discounting on the high street and the reduction in VAT caused the biggest fall in inflation last month since the recession of the early 1990s, official figures revealed today.

The fall in the annual rate of UK inflation - as measured by the Consumer Prices Index (CPI) - fell to 3.1 per cent from 4.1 per cent in December, according to the Office for National Statistics (ONS).

The drop also marked the first time inflation fell in December since records began, said the ONS.

The fall in CPI is less than experts were expecting, with many pencilling in a drop to as low as 2.6 per cent.

But the decrease will heighten fears over deflation as the impending recession is expected to see further falls over the year ahead.

CPI has fallen significantly from a peak of 5.2 per cent last September.

And the Retail Prices Index (RPI) last month fell at its fastest rate in more than 28 years, as house price declines and the recent dramatic interest rate cuts added to the VAT impact.

RPI, which includes mortgage interest payments, plunged to 0.9 per cent in December from 3 per cent the previous month.

The ONS said the cut in VAT had the biggest effect on inflation, knocking 1 per cent off CPI in December, with greater early Christmas discounting adding to the fall.

Two-thirds of retail prices saw the Government's cut in VAT from 17.5 per cent to 15 per cent passed on last month, added the ONS.

Cut-price promotions saw clothing and footwear deflation of 10.3 per cent last month - its lowest level since official records began in January 1997.

More falls in the price of fuel also combined to knock CPI lower, with the annual rate of fuel deflation at 11.2 per cent.

Graeme Leach, chief economist at the Institute of Directors, said: "Inflation is most definitely yesterday's story. Unless the huge stimulus from the VAT reduction, record low interest rates, a falling pound and the collapse in the oil price begin to take effect soon, the UK will be staring deflation in the face."

Comments

( Leave a comment )

The China effect

unlikelylad wrote:

Tuesday, 20 January 2009 at 01:27 pm (UTC)

There is currently a deluge of products overhanging the market place. Our ports and those of our neighbours are full of goods just waiting to be unloaded onto our shores in search of demand. This overhang is real, it will cause goods inflation to crumble and enviromentaly it is a disaster. What is also clear is that other inflation, public transport, local taxation and seasonal food will see far less natural downward drift in prices in fact the opposite. Everything that we don't need will fall in price (short term) and everything that we have no choice but to buy will increase (short and long term). It then falls on our illustrious statisticians to reweight the basket to this effect. To keep the basket weights the same in a recession as they are in boom is wholely misleading and another reason why this current actions will be deemed a policy mistake in a few years time.

Link | Reply | Thread

Still above target

jake_f66 wrote:

Tuesday, 20 January 2009 at 02:37 pm (UTC)

Will we ever see it hit, let alone stay long below it's target of 2%? Soon the currency hedges will run out and all imported goods will have to rise considerably in price. Benefits received a huge boost because the RPI hit top at above 5% in the crucial September month. Justice would demand that they will be cut if the RPI happens to be negative next September. But will they? Or is it just heads you win, tails you never lose as a benefit customer?

Link | Reply | Thread