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UK inflation drops to lowest since 2010

London, February 14, 2012

British inflation dropped sharply in January as the effect of a rise in sales tax in 2011 fell away, backing Bank of England forecasts for a sharp easing of price pressure this year and providing some relief for cash-strapped consumers.

The decline to 3.6 per cent - its lowest annual rate in more than a year - will reassure the BoE as it prepares to publish an update to its quarterly economic forecasts on Wednesday.

But it will not spare bank governor Mervyn King from having to write a public letter explaining why inflation has remained well above target for the past two years.

The Office for National Statistics said consumer price inflation fell from 4.2 per cent in December, in line with economists' forecasts and extending a marked drop from September's three-year peak of 5.2 per cent.

Economists reckon the central bank will continue to predict that CPI will fall below its 2 per cent target by the end of 2012, and remain below target in two years' time, as weak growth and an end to energy price rises take effect.

Lower inflation may also lift consumer demand, which has been a major drag on Britain's sluggish economy, at a time when there are also major headwinds from the euro zone debt crisis and the government's austerity programme.

Those factors were reflected in a decision by credit agency Moody's to put the nation's prized triple-A rating on a negative outlook, though finance minister George Osborne said Britain would not stray from its debt-cutting measures.

January's inflation reading - the lowest since November 2010 - is in line with BoE forecasts for an average of just over 3.4 per cent in the first three months of 2012.

'Consumer price inflation should fall appreciably further in February, reflecting the fact that a number of retailers and companies delayed passing on the VAT hike at the start of 2011, and also due to utility providers trimming energy prices,' said IHS Global Insight economist Howard Archer.

 Bank governor King is likely to focus on the weak economy and the fading of one-off upward pressures on inflation when he publishes the quarterly letter to Osborne later on Tuesday explaining why CPI is above target.

Osborne's department welcomed the fall in inflation as 'good news for family budgets'.

Despite the above-target inflation, the BoE's Monetary Policy Committee last week pressed ahead with another 50 billion pounds of quantitative easing via gilt purchases over the next three months, in order to boost faltering growth.

If the sharp fall in inflation does not continue, this may be the last bout of QE. Some policymakers expressed concerns last year about whether inflation would fall as fast as forecast once the downward effect of one-off factors faded.

The ONS said January's fall in CPI was mostly due to January 2011's increase in the standard rate of value-added tax to 20 per cent from 17.5 per cent now being fully included in annual comparisons. Other things being equal, this reduced the rate of inflation by 0.76 percentage points, an ONS statistician said.

A stabilisation in petrol prices also pushed down the rate of inflation in the transport sector to its lowest since October 2009, but there remained upward pressure from financial services, clothing and footwear and air travel.

The downward trend looks likely to persist. Major utility companies have announced cuts of about 5 per cent to their gas and electricity prices, which will take effect over the next three months. – Reuters




Tags: inflation | London | UK | Bank of England | Sales Tax |

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