Relief for households as cost of living falls

The sharpest slide in the cost of living for nearly three years offered some relief for squeezed household wallets yesterday, amid festive price slashing and easing pressure from petrol prices and energy bills.

December's fall in the Bank of England's Consumer Prices Index (CPI) benchmark from 4.8 per cent to 4.2 per cent – the biggest drop since April 2009 – heralds a year of steeply falling inflation after four years of wages trailing well behind the cost of living.

The fall should ease any remaining concerns at the Bank of England over lingering inflation and it paves the way for rate-setters to give another boost to a struggling UK economy through quantitative easing – in effect, printing money – next month.

The recent price cuts by the "big six" energy companies will also feed through to lower inflation in the months ahead.

Petrol prices dropped by an average of 1.1p last month compared with a 3.2p rise a year earlier, dragging down the inflation rate according to the Office for National Statistics.

Gas prices also held steady during December, while retailers were forced into deeper Christmas discounts than last year. Clothing and footwear prices fell by 2.8 per cent between November and December as womenswear prices were slashed. Even bigger falls in the CPI are expected next month when the VAT rise to 20 per cent – introduced by George Osborne a year ago to help tackle the deficit – falls out of the figures.

The Bank, which pumped another £75bn into the economy last October in response to turmoil in the eurozone, could see inflation back to 2 per cent by the end of this year, experts said. ING Bank's James Knightley said: "Given the growing threat of recession, further policy stimulus from the Bank (is) likely, starting with another £75bn of gilt purchases in February."

Despite the cheer on inflation, figures today are set to reveal a fresh rise in unemployment after hitting 2.64 million in the quarter to October.