UK inflation falls to 3.1%

| January 20, 2009 | 0 Comments

Figures out today from the Office for National Statistics (ONS) have revealed that consumer price inflation fell in December to an annual rate of 3.1% from 4.1% in November.

However, the rate is still higher than the Bank of England’s target of 2%.

According to the ONS, the reduction in VAT to 15% from 17.5% played a major part in the fall.

Hugh Pym, BBC chief economics correspondent, explains that the 3.1% annual rate was slightly higher than many analysts had predicted. As the recession takes hold, inflation is heading lower.

Meanwhile, retail price inflation (which includes mortgage rates) fell to 0.9% in December from a rate of 3% in November - the biggest drop in 28 years.

Food and energy prices are propping up inflation as both are still higher than levels seen this time last year. However, food and energy prices are expected to decline over the next few months as a result of low oil prices.

Many analysts believe that inflation will continue to fall this 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.

Howard Archer of IHS Global Insight believes the further fall in inflation will provide the Bank of England with more scope to cut interest rates even further.

Earlier this month, the Bank cut rates to 1.5% - the lowest level since the Bank of England was established 315 years ago.

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