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Inflation rate expected to fall UK inflation rate declines to 3%
(about 3 hours later)
The latest figures for the rate of inflation are expected to show that it has fallen again. Core consumer price inflation (CPI) fell in January to an annual rate of 3%, down from 3.1% in December, official figures have shown.
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 modest decline is less than expected - the consensus forecast was for an annual rate of 2.7%.
The most recent inflation figures for the 12 months to December showed a rate of 3.1%. Inflation has now fallen for four straight months from a high of 5.2% in September, driven down by falls in energy costs and fuel prices.
The Bank of England has already cut interest rates to 1% in an attempt to stimulate demand and the economy. The headline Retail Prices Index (RPI) fell to 0.1% from December's 0.9%.
Analysts expect the core rate - referred to as the Consumer Price Index (CPI) - to come in at about 2.7%. The falls in energy bills were slightly offset by rises in the price of household equipment, such as furniture, alcohol, clothing and footwear.
CPI dropped sharply in December to 3.1%, from November's figure of 4.1%. The Bank of England has already cut interest rates to 1% in an attempt to stimulate the economy.
The biggest factor in that drop was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report in November. Another factor in the fall in inflation 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.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.
DeflationDeflation
Others believe that core inflation could become negative this year, a situation known as 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.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.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."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.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.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.