Lower bills to drag inflation down


Jamie Grierson
Monday 19 March 2012 15:16

Lower utility bills and discounting from struggling retailers are set to pull the rate of inflation down to a 15-month low tomorrow.

The consumer prices index (CPI) is forecast to fall to 3.3% in February, from 3.6% in January, as energy cuts by E.ON and Scottish Power came into effect, but experts have warned the cost of living in the months ahead could be stickier than previously thought.

Non-food retailers also continued to slash prices in the month, according to the British Retail Consortium, as they battled to pull in cash-strapped consumers.

The dip in the CPI rate of inflation will continue the downward trend experienced in recent months and matches forecasts by the Bank of England, which predicted that the rise in cost of living would ease throughout 2012.

However, Victoria Cadman, economist at Investec, warned February's inflation outturn is "unlikely to be without some upward pressures too" with food and fuel prices appearing to have recorded firmer month-on-month rises.

Other economists have suggested higher-than-expected oil prices present a "very real danger" that the inflation rate will not subside as quickly as predicted.

The cost of Brent crude in London has risen by nearly 25% since the start of the year to around 125 US dollars a barrel as tensions in Iran and Syria escalate.

The resurgent price reportedly prompted President Barack Obama and Prime Minister David Cameron to discuss releasing strategic oil reserves to curb further rises.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "If consumer price inflation does prove to be sticky over the coming months, this will have worrying implications for UK growth prospects.

"Sticky consumer price inflation would maintain an appreciable squeeze on consumers' purchasing power and dilute hopes that consumers will increasingly step up their spending as 2012 progresses."

Scottish Power reduced gas tariffs by an average 5% for around 1.4 million domestic gas customers in February, after E.ON announced a 6% fall in electricity bills, benefiting 3.7 million customers.

The easing rate of inflation will be welcomed by households who were squeezed by high inflation and sluggish wage growth throughout 2011 and will add further weight to the Bank's decision to pump an extra £50 billion into its quantitative easing programme.

Bank governor Sir Mervyn King and his colleagues have forecast the rate of inflation to dip below the Government's 2% target at some point in early 2013.


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