Inflation in December fell to lowest in six months
Official figures have indicated that in December, the Consumer Prices Index (CPI) measure of inflation fell to 4.2%, the lowest since June 2011.
In November, the CPI was 4.8% and the drop in December was the biggest monthly fall since April 2009, giving weight to the Bank of England’s prediction that inflation would fall to 2% by the end of 2012.
The Retail Prices Index (RPI) measure of inflation also fell from 5.2% to 4.8%. RPI is usually higher than CPI as it includes mortgage interest payments in its calculation.
A 2.8% drop in the average prices of clothing and footwear over the Christmas period helped to lower inflation. The Bank of England have been predicting that retailers would be forced to cut their prices in the face of weak demand from consumers and that this would have an impact on inflation.
The Bank have also indicated that last year’s rise in VAT had played a part in the high rates of inflation and this will no longer have as big an impact on future rates.
Other factors that helped to bring down inflation include a 0.6% drop in energy prices. Since December, the main energy suppliers have cut some of their rates, and this is expected to impact further on inflation in the coming months. Petrol prices have also been falling.
Food prices rose by 1.4% and were a negative impact on the rate of inflation. Other negative pressures on inflation included an increase the cost of phone calls.
Chris Williamson, from Markit, said: “Further falls are likely in coming months, reducing the squeeze on incomes seen last year and therefore providing a much-needed boost to economic growth in 2012. The data therefore add support to the Bank of England’s expectation that inflation will drop below its 2% target by the end of the year.”
Many experts are now expecting the Bank of England complete the next phase of quantitative easing, which will see the bank pump £75 billion into the economy, in the form of asset purchases.