Inflation down to 3.6% in January
Inflation fell sharply in January to 3.6 per cent on the Consumer Prices Index (CPI), from 4.2 per cent in December, according to the latest official figures.
Retail Prices Index (RPI) inflation, which includes housing costs such as mortgage interest and council tax, fell to 3.9 per cent from 4.8 per cent.
Although CPI inflation has fallen for the last four months and is now at its lowest level for 14-months, it is still substantially higher than the Bank of England’s 2% target.
However the downward trend is expected to continue throughout the year.
In a statement the Treasury said: “Inflation fell significantly in January for the second month in a row, which is good news for family budgets.
“The Bank of England and other forecasters expect inflation to keep falling through this year, providing additional relief.”
The fall in inflation is seen as justification for the Bank of England’s decision to launch another round of quantitative easing to boost the economy and stave off another recession.
Last week it decided to inject £50bn into the economy by creating electronic money and buying gilts.
It suggested that without further quantitative easing, inflation was likely to fall below its 2% target due to rising unemployment and falling energy prices and with January 2011’s 2.5 per cent increase in VAT no longer a factor in the annual comparison.
In his letter to the Chancellor explaining why inflation was still more than 1 per cent above target, the governor of the Bank of England, Mervyn King, said:
“Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high”.
Although lower inflation will help to ease the strain on household incomes, savers with index-linked savings accounts should be aware that it will mean lower interest payments.