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UK inflation falls to 4.1%

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by Kay Mitchell

Inflation in the UK fell again in November to 4.1%, according to official figures. The decline follows that in October from its 16-year high of 5.2% to 4.5%.

Consumer Prices Index (CPI) inflation is now at its lowest since June but is still less of a decline than expected by many analysts, with some predicting a fall to 3.9%.

Inflation is continuing to fall as a result of lower oil and energy costs.

However, the fall still means that Mervyn King, the Governor of the Bank of England, will have to write a letter to Chancellor Alistair Darling to explain the level of inflation.

Every third month when inflation exceeds its target by more than a full percentage point, the Governor has to outline what steps the Bank is taking to return it to its target of 2%. In his letter, Mr King said very low inflation was a possibility.

Many analysts believe that inflation will continue to fall into the New Year with some concerned that it will drop below the 2% target and deflation is a possibility.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Policymakers believe inflation is no longer a threat as the recession deepens, and have warned of the danger of deflation next year.

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News posted: December 16, 2008

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