Inflation falls sharply in December


As expected the rate of inflation fell sharply in December.

Figures released today by the Office for National Statistics (ONS) show that the Consumer Prices Index (CPI) fell from 4.8% in November to 4.2% in December, mostly due to lower fuel and clothing prices.

The Retail Prices Index (RPI), which includes mortgage interest payments, fell to 4.8% in December, from 5.2% in the previous month.

The drop in the rate of CPI inflation is the largest fall since April 2009.

Clothing, fuel and alcohol

Clothing showed a price reduction of 2.8% in December as retailers cut prices to tempt shoppers to buy before Christmas.

The cost of fuel fell by 0.6%; a further fall in the cost of fuel will be expected in months to come when January’s price reductions from the leading suppliers are factored in.

However, despite ferocious competition between the UK’s supermarkets the price of food actually rose by 1.4%, a 9% year on year rise in the cost of alcohol also prevented the rate of inflation from falling further.

Lower inflation predicted

The sharp drop is in line with Bank of England predictions that inflation will fall to within their target of 2% by late 2012. Furthermore economists including the respected Centre for Economic and Business Research (CEBR), predict that not only will inflation fall to within the Bank’s target, it will remain well below the 2% level for much of 2013.

Further falls in the rate of inflation are likely next month as last January’s VAT increase will fall out of the calculations. Stagnant growth in the Eurozone, which is the UK’s largest trading partner, is also likely to further reduce the rate of inflation.

Savers benefit from falling inflation

The UK’s savers will be amongst the main beneficiaries of lower inflation.

Over the past couple of years savers have been hit by a double whammy of high inflation and all time low interest rates; even if they found the best savings interest rates most savers have seen their savings fall in real terms value. Whilst interest rates show no sign of rising in 2012, indeed there are some who predict no increase for years to come, the fall in inflation announced today and the predicted levels for 2012 will at least make it a little easier for savers to get a real return on their savings.

The news that the rate of inflation has finally peaked and is falling will also be welcomed by employees who have seen their wages rise more slowly than prices, causing a squeeze on household incomes.