UK inflation rate falls to 49-year low

| February 17, 2009 | 0 Comments

Figures out today from the Office for National Statistics (ONS) have revealed that consumer price inflation (CPI) fell in January to an annual rate of 3% from 3.1% the previous month.

Inflation reached a 16-year high in September of 5.2% but today’s fall means the rate is still higher than the Bank of England’s target of 2%.

Meanwhile, the ONS said retail price inflation (RPI), which includes mortgage rates, fell to 0.1% in January from 0.9% in December - the lowest level of RPI since March 1960.

Inflation is continuing to fall as a result of lower oil and energy costs, while the 2.5% cut in VAT in December has also been attributed to the fall.

Interest rates in the UK are currently at the lowest level since the Bank of England was established over 300 years ago. Rates have been cut due to fears over inflationary pressure in the economy. However, policymakers believe inflation is no longer a threat as the recession deepens, and have warned of the danger of deflation next year.

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.

In related news, yesterday the Confederation of British Industry (CBI) warned that the UK economy will contract at nearly double the rate previously forecast this year.

The organisation said that the deteriorating global economy, together with a rise in unemployment and the ongoing difficulties that UK firms are facing in accessing credit will drive the economy deeper into recession this year.

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