Inflation plunge to ease pressure on households

The squeeze on stretched household finances is set to ease early next year with a sharp plunge in inflation, Bank of England chief economist Spencer Dale said yesterday.

The prospect of some relief after the biggest hit to disposable incomes since the Second World War in 2011 came as the Bank's official consumer prices index benchmark fell to 4.8 per cent in November, the second month in a row of sliding inflation.

Mr Dale said that the decline was set to accelerate as previous big increases in costs, such as household energy bills and January's VAT rise, fall out of the equation.

"Barring some large and unanticipated price increases, CPI inflation looks set to come down to the 'low threes' by March next year."

This is still well above the Bank's 2 per cent target, but its Monetary Policy Committee reckons stuttering growth next year will keep the cost of living on a downward path.

Mr Dale added: "I hope and expect that 2012 will come to be seen as the year in which inflation fell back, and in so doing, the hardships faced by many households from the squeeze in their real incomes eased."

He blamed high inflation and low spending by businesses and households for the UK's stuttering performance during the past year, adding that "not all of our disappointing growth performance over the past year can be laid at the door of the euro crisis".

The chief economist, who voted for rate hikes earlier this year, hinted that he could resume his hawkish stance because he feared inflation could end up being higher than the MPC's estimates.

The lingering impact of a supermarket price war and better harvests than last year helped drag down inflation as well as easing pressure at the petrol pumps after a 1p drop in fuel prices.

The City seized on the good news in a week when a growing number of forecasters predicted recession in the UK. Markets are braced for a rise in unemployment past 2.6 million today.