UK inflation rate falls in September to 1.1%

| October 13, 2009
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The Consumer Prices Index (CPI), a key measure of inflation, has fallen from 1.6% to an annual 1.1% in August – the lowest level since September 2004, the Office for National Statistics (ONS) said today.

While the decline in inflation was higher than analysts had expected, it was primarily due to lower food and energy costs.

According to the ONS, electricity, gas and other fuel bills fell by 7.3% on the year.

Meanwhile, the Retail Prices Index (RPI) (which includes mortgage costs) fell from -1.3% to -1.4%.

Over the last year or so, the RPI rate has declined as the Bank of England cut interest rates to 0.5% – the lowest level since the Bank was established over 300 years ago.

The fall means inflation continues to be below the Bank of England’s target of 2%.

If CPI falls below 1%, the Mervyn King, the Governor of the Bank of England, will have to write a letter of explanation to Chancellor Alistair Darling.

According to Howard Archer, Chief Economist at IHS Global Insight, once VAT is reverted back to the 17.5% rate in January 2010, the annual inflation rate will increase.

Meanwhile, the news of inflation sent sterling falling 0.5% against the euro to a six-month low of 1.0628 euros. Furthermore, the pound lost ground against the US dollar to $1.5730 (a five-month low).

Today’s inflation figures will mean investors will continue to lose their appetite for the currency, according to analysts.

In other news today, the British Chambers of Commerce (BCC) has cast doubt over the UK’s exit from recession in the third quarter.

Many reports are suggesting that the UK will emerge from recession in the July to September, however the leading business group said while business confidence has strengthened, the economy was still “frail”.

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