Relief for King as price rises start to ease at last

Inflation fell back to 5 per cent in October – from 5.2 per cent the previous month – giving policymakers hope that price rises across the economy have now peaked.

The latest report from the Office for National Statistics (ONS) yesterday also showed that annual retail price inflation, which includes housing costs, fell to 5.4 per cent last month, down from 5.6 per cent in September.

The ONS said that the fall in annual consumer price inflation (CPI), which was slightly more than economists expected, was due in part to a decline in the cost of food, with supermarkets discounting their products in order to increase market share and prices driven down by a decent harvest in certain goods.

The price of fruit was down 1.6 per cent. Vegetable prices were down 2.4 per cent. A decline in air fares and a fall in the price of petrol also contributed to the drop in the overall CPI index. The price of air travel fell by 6 per cent on the previous month and pump prices were down 0.5p per litre.

Despite the fall in CPI , the index remains well above the Bank of England's target rate of 2 per cent and the Bank's Governor, Sir Mervyn King, was compelled to write another letter to the Chancellor George Osborne to explain why price rises are still overshooting. In the letter, Sir Mervyn reiterated the Bank's forecast that inflation will drop sharply next year thanks to slowing economic growth and as distorting effects, such as this year's increase in VAT and rising global commodity prices, fall out of the system.

The greater risk over the medium term, according to the Governor, is that the Bank will undershoot its 2 per cent target. That is why the Monetary Policy Committee voted unanimously to increase its £200bn Quantitative Easing programme by £75bn in October. The Bank is expected to unveil a sharply lower growth forecast for 2012 when it releases its quarterly Inflation Report.

There was, however, an ominous sign that price increases in the British economy might prove to be more persistent than policymakers believe. Annual core CPI inflation, which strips out variable factors such as oil and food, rose to 3.4 per cent in October. This was in large part was due to increases in the prices of clothing, games, toys and media.

"This sits oddly with the weakness in high street spending and one can only assume retailers are still passing on higher costs following the fall in the exchange rate a couple of years ago," Karen Ward, at HSBC, said.

The Government welcomed the fall in CPI, but said that it is still committed to action to mitigate the effects of rising prices on the public.

A Treasury spokesman said: "Whilst price inflation eased slightly in October, the Government recognises that these are difficult times for households as prices continue to be affected by conditions in the global oil and gas markets. The Bank of England has forecast that inflation should fall rapidly over 2012, but in the meantime the Government is taking action to help consumers with current high costs, including by increasing the personal tax allowance and freezing council tax, having also cut fuel duty".

But Labour said that the Government would do more good by reversing its hike in VAT to 20 per cent, up from 17.5 per cent. The shadow Treasury minister Owen Smith said: "Reversing January's VAT rise temporarily... would ease the squeeze on families and help to kick-start our flat-lining economy."

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