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UK inflation rate declines to 3% UK inflation rate declines to 3%
(about 3 hours 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 Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown.
The modest decline is less than expected - the consensus forecast was for an annual rate of 2.7%. 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.
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. 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 headline Retail Prices Index (RPI) 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'
This is the lowest level of retail price inflation since 1960. The headline RPI rate of 0.1% is the lowest rate it has been since 1960.
It's very disappointing. Inflation is not coming down as quickly as we had anticipated Economist David Page, Investec 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 RPI is used as the rate upon which wage and train ticket rises are based. The low level of RPI inflation could lead to some tricky wage negotiations.
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."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. In light of the current strain on government finances, Mr Philpott 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. 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.
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."
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.
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.
FROM THE TODAY PROGRAMME More from Today programmeFROM 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. 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.
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.
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. Many analysts expect the Bank of England to cut the Bank Rate by a further half percentage point in March to 0.5%.
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. 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.