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Inflation rate expected to fall | Inflation rate expected to fall |
(about 4 hours later) | |
The latest figures for the rate of inflation are expected to show that it has fallen again. | The latest figures for the rate of inflation are expected to show that it has fallen again. |
Figures for January are expected to show inflation dropping below 3%, as lower oil prices and the reduction in VAT drive down the annual rate. | |
The most recent inflation figures for the 12 months to December showed a rate of 3.1%. | The most recent inflation figures for the 12 months to December showed a rate of 3.1%. |
The Bank of England has already cut interest rates to 1% in an attempt to stimulate demand and the economy. | The Bank of England has already cut interest rates to 1% in an attempt to stimulate demand and the economy. |
Analysts expect the core rate - referred to as the Consumer Price Index (CPI) - to come in at about 2.7%. | |
CPI dropped sharply in December to 3.1%, from November's figure of 4.1%. | |
The biggest factor in that drop was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report in November. | The biggest factor in that drop was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report in November. |
The Bank of England believes the core rate will drop to 0.5% this year and will remain below its 2% target for two years. | |
Deflation | |
Others believe that core inflation could become negative this year, a situation known as deflation. | |
In the short term, that might provide a boost to the economy by increasing consumers' spending power, but in the longer term it can cause serious economic problems. | |
This is because consumers postpone spending as prices fall, which reduces companies' revenues. | |
"We still think it likely that the targeted measure [CPI] will drop into negative territory for a while this year," said Philip Shaw at Investec Securities. | |
Some analysts expect Tuesday's figures to show that the Retail Price Index (RPI) - which includes housing and mortgage costs - has already fallen into negative territory. | |
Mr Shaw is forecasting another half point cut in interest rates in March, to 0.5%, as the Bank of England tries to stave off deflation. | |
With little scope for further rate cuts, the Bank is expected to pursue a policy of quantitative easing, where it increases the supply of money into the economy. |