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UK inflation rate declines to 3% UK inflation rate declines to 3%
(40 minutes later)
Consumer price inflation (CPI) fell in January to an annual rate of 3%, down from 3.1% in December, official figures have shown.Consumer price inflation (CPI) fell in January to an annual rate of 3%, down from 3.1% in December, official figures have shown.
The modest decline is less than expected - the consensus forecast was for an annual rate of 2.7%.The modest decline is less than expected - the consensus forecast was for an annual rate of 2.7%.
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.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 headline Retail Prices Index (RPI) fell to 0.1% from December's 0.9%.The headline Retail Prices Index (RPI) fell to 0.1% from December's 0.9%.
This is the lowest level of retail price inflation since 1960.This is the lowest level of retail price inflation since 1960.
The RPI is used as the rate upon which wage and train ticket rises are based.The RPI is used as the rate upon which wage and train ticket rises are based.
Another factor in the fall in prices was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report in November.Another factor in the fall in prices was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report in November.
'Very disappointing''Very disappointing'
The falls in energy bills were slightly offset by rises in the price of household equipment, such as furniture, and alcohol, clothing and footwear.The falls in energy bills were slightly offset by rises in the price of household equipment, such as furniture, and alcohol, clothing and footwear.
The smaller than expected drop was also due in part to a reluctance by retailers to slash prices further after heavy discounting in December.The smaller than expected drop was also due in part to a reluctance by retailers to slash prices further after heavy discounting in December.
Jonathan Loynes at Capital Economics described the modest decline as a "temporary aberration reflecting the partial reversal of some very aggressive price discounting in December."Jonathan Loynes at Capital Economics described the modest decline as a "temporary aberration reflecting the partial reversal of some very aggressive price discounting in December."
Indeed, the 0.1% drop was smaller than analysts had hoped for.Indeed, the 0.1% drop was smaller than analysts had hoped for.
"It's very disappointing. Inflation is not coming down as quickly as we had anticipated and suggests there is still some lingering [inflationary] pressure," said David Page at Investec."It's very disappointing. Inflation is not coming down as quickly as we had anticipated and suggests there is still some lingering [inflationary] pressure," said David Page at Investec.
One of the reasons why the Bank of England delayed cutting interest rates last year was concern over inflationary pressure in the economy.One of the reasons why the Bank of England delayed cutting interest rates last year was concern over inflationary pressure in the economy.
The bank has already cut interest rates to 1% in an attempt to stimulate the economy.The bank has already cut interest rates to 1% in an attempt to stimulate the economy.
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It believes the core rate will drop to 0.5% this year and will remain below its 2% target for two years.It 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, this can 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, this can 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.
If the economy does experience deflation, RPI, which stands at just 0.1%, is likely to become negative first.
"Next month, we'll see that measure move into deflation," said Ross Walker at RBS.
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.