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UK inflation rate declines to 3% | UK inflation rate declines to 3% |
(about 3 hours later) | |
Consumer Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown. | |
CPI inflation has now fallen for four months in a row from a high of 5.2% in September, driven down by falls in energy costs and fuel prices. | |
Retail Prices Index (RPI) inflation, which includes mortgage costs and is often used in pay negotiations, fell to 0.1% from December's 0.9%. | |
The drop in RPI may lead to pressure on employers to limit pay rises. | |
'Extraordinary occurrence' | 'Extraordinary occurrence' |
The headline RPI rate of 0.1% is the lowest rate it has been since 1960. | |
In addition to falling energy prices, the reduction in VAT from 17.5% to 15%, announced in the pre-Budget report in November, also had an effect. | |
The low level of RPI inflation could lead to some tricky wage negotiations. | |
"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. | "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, Mr Philpott called for a freeze on public sector pay. | |
David Page, an economist at Investec, said wage growth would slow "quite markedly" this year. | |
However, he added: "It will be very hard for firms to push through wages growth at a lower level than 1% or 2%." | |
'Very disappointing' | 'Very disappointing' |
The modest decline in CPI was less than expected - the consensus forecast among analysts had been for an annual rate of 2.7%. | |
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. |
FROM THE TODAY PROGRAMME More from Today programme | FROM THE TODAY PROGRAMME More from Today programme |
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". | |
One of the reasons why the Bank of England delayed cutting interest rates last year was concern over inflationary pressures in the economy. | |
The bank has already cut interest rates to 1% in an attempt to stimulate the economy. | |
It believes that CPI inflation 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. |
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. |
Many analysts expect the Bank of England to cut the Bank Rate by a further half percentage point in March to 0.5%. | |
However, with little scope for further rate cuts, the Bank is also expected to pursue a policy of quantitative easing, where it increases the supply of money into the economy. |