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UK inflation rate declines to 3% | UK inflation rate declines to 3% |
(about 1 hour 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%. |
'Extraordinary occurrence' | |
This is the lowest level of retail price inflation since 1960. | This is the lowest level of retail price inflation since 1960. |
It's very disappointing. Inflation is not coming down as quickly as we had anticipated Economist David Page, Investec | |
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. |
Such a low rate of retail inflation increases pressure on employers to introduce pay freezes. | |
"A zero or negative RPI could result in the extraordinary occurrence of average pay increases also falling towards zero," said John Philpott at the Chartered Institute of Personnel and Development. | |
In light of the current strain on government finances, he called for a freeze on public sector pay. | |
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. |
FROM THE TODAY PROGRAMME More from Today programme | FROM THE TODAY PROGRAMME More from Today programme |
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. |
Deflation | Deflation |
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. | 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. | "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. |