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| Consumer inflation falls to 4.5% | Consumer inflation falls to 4.5% |
| (1 day later) | |
| Official figures show that UK inflation fell in October from a 16-year high, as oil and transport costs - as well as food prices - fell. | Official figures show that UK inflation fell in October from a 16-year high, as oil and transport costs - as well as food prices - fell. |
| The Consumer Prices Index (CPI) measure dropped to 4.5% from 5.2% in September. | The Consumer Prices Index (CPI) measure dropped to 4.5% from 5.2% in September. |
| The Office for National Statistics says the month-on-month fall in the CPI figure is the biggest drop in 16 years. | The Office for National Statistics says the month-on-month fall in the CPI figure is the biggest drop in 16 years. |
| The Retail Prices Index, (RPI) the alternative measure of inflation, which includes housing costs, fell from 5% to 4.2%, the biggest fall since 2003. | The Retail Prices Index, (RPI) the alternative measure of inflation, which includes housing costs, fell from 5% to 4.2%, the biggest fall since 2003. |
| See how inflation has changed | See how inflation has changed |
| The RPI measure is sometimes referred to as the "headline" rate of inflation, and is often used for agreeing pay settlements, or calculating the uprating of benefits such as pensions. | The RPI measure is sometimes referred to as the "headline" rate of inflation, and is often used for agreeing pay settlements, or calculating the uprating of benefits such as pensions. |
| Meanwhile, core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, fell from the series high of 2.2% in September to 1.9%. | Meanwhile, core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, fell from the series high of 2.2% in September to 1.9%. |
| Food prices fall | Food prices fall |
| The CPI fall was the biggest since August last year. | The CPI fall was the biggest since August last year. |
| "The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year," said the ONS. | "The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year," said the ONS. |
| Deflation would have appalling consequences for British business and for the economy as a whole David Kern, British Chambers of Commerce Calculate your personal inflationDeflationary dangers | Deflation would have appalling consequences for British business and for the economy as a whole David Kern, British Chambers of Commerce Calculate your personal inflationDeflationary dangers |
| "The decrease this year was triggered by a sharp fall in the price of crude oil." | "The decrease this year was triggered by a sharp fall in the price of crude oil." |
| There was also a fall in the price of both air transport and sea transport. | There was also a fall in the price of both air transport and sea transport. |
| There was another large downward contribution from food and non-alcoholic beverages, with meat prices being cut by supermarkets. | There was another large downward contribution from food and non-alcoholic beverages, with meat prices being cut by supermarkets. |
| Key interest rates | Key interest rates |
| The Bank of England has said inflation could fall below its target of 2% next year - and might drop as low as 1%. | The Bank of England has said inflation could fall below its target of 2% next year - and might drop as low as 1%. |
| This year, the UK economy shrank for the first time since 1992 - falling by 0.5% in the third quarter of 2008. | This year, the UK economy shrank for the first time since 1992 - falling by 0.5% in the third quarter of 2008. |
| This led the Bank of England to lower its key Bank Rate in October by 1.5 percentage points - to 3% from 4.5% - its lowest level since 1955. | This led the Bank of England to lower its key Bank Rate in October by 1.5 percentage points - to 3% from 4.5% - its lowest level since 1955. |
| With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year Hetal Mehta, Ernst & Young Item Club David Kern, chief economist at the British Chambers of Commerce, said: "Following these [inflation] figures, it is clear that UK interest rates will be cut further, most likely to 2% in early 2009. | With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year Hetal Mehta, Ernst & Young Item Club David Kern, chief economist at the British Chambers of Commerce, said: "Following these [inflation] figures, it is clear that UK interest rates will be cut further, most likely to 2% in early 2009. |
| "One cannot rule out rate cuts below 2% later next year." | "One cannot rule out rate cuts below 2% later next year." |
| The impact of the rapidly-slowing UK economy is pulling down cost-of-living increases thanks to falling food and fuel prices - the latter helped by crude oil prices remaining under $60 a barrel. | The impact of the rapidly-slowing UK economy is pulling down cost-of-living increases thanks to falling food and fuel prices - the latter helped by crude oil prices remaining under $60 a barrel. |
| Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year. | Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year. |
| "And while it is still unlikely on the CPI measure, the prospect of deflation cannot be ruled out." | "And while it is still unlikely on the CPI measure, the prospect of deflation cannot be ruled out." |
| Deflation 'likely' | Deflation 'likely' |
| Figures from the Office for National Statistics, show that output prices - the price of goods leaving the factory - dropped by 1% in October. | Figures from the Office for National Statistics, show that output prices - the price of goods leaving the factory - dropped by 1% in October. |
| Input prices - the cost of raw materials purchased by the manufacturers - dropped by 5.6% in October, the biggest drop since 1986. | Input prices - the cost of raw materials purchased by the manufacturers - dropped by 5.6% in October, the biggest drop since 1986. |
| Mervyn King, the Governor of the Bank of England, says it is now "very likely'' that the UK's retail price index will turn negative next year. | Mervyn King, the Governor of the Bank of England, says it is now "very likely'' that the UK's retail price index will turn negative next year. |
| The Bank is expected to cut rates again in December, say economists, perhaps by a full percentage point to 2%, a level not seen since the 1930s. | The Bank is expected to cut rates again in December, say economists, perhaps by a full percentage point to 2%, a level not seen since the 1930s. |
| Downward spiral? | Downward spiral? |
| A short period of deflation - where prices fall rather than rise - would not be a disaster, but a longer period of falling prices might be, say economists. | A short period of deflation - where prices fall rather than rise - would not be a disaster, but a longer period of falling prices might be, say economists. |
| In prolonged periods of deflation, consumers hold off buying goods, reckoning they will be cheaper later on, according to economic theory. | In prolonged periods of deflation, consumers hold off buying goods, reckoning they will be cheaper later on, according to economic theory. |
| This can lead to further falls in demand and output. As firms sell less, they respond by cutting jobs or cutting wages. | This can lead to further falls in demand and output. As firms sell less, they respond by cutting jobs or cutting wages. |
| Overall, consumers then have less money to spend - and demand falls yet again. | Overall, consumers then have less money to spend - and demand falls yet again. |
| "The possibility of deflation at that time is now a distinct risk," said the BCC's Mr Kern. | "The possibility of deflation at that time is now a distinct risk," said the BCC's Mr Kern. |
| "Deflation would have appalling consequences for British business and for the economy as a whole so it is imperative that the government and Bank monetary policy committee take forceful action." | "Deflation would have appalling consequences for British business and for the economy as a whole so it is imperative that the government and Bank monetary policy committee take forceful action." |
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