Inflation deflates to 4.2%

Good news. The Consumer Price Index (CPI) fell to 4.2% in December, down from 4.8% in November.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

According to data released by the Office for National Statistics this morning, inflation is continuing to ease with a 0.4% drop last month. The Retail Prices Index has also come down: it now stands at a steady 4.8%, down from a belt-tightening 5.2%.

Inflation still stands at more than double the Bank of England’s recommended rate (around 2%), but the latest CPI figure – down from an all-time high of 5.2% back in September – is a positive sign for the economy. Not to mention for impecunious consumers, who could see their money woes begin to ease.

The ONS reveals that the price of clothing and footwear dropped 2.8% in the run up to Christmas. Mostly through frantic early sales as retailers struggled to shift stock. Fuel prices have also dropped 0.6%, helping motorists save a few pennies. But, interestingly, food prices actually rose last month, up 1.4%. This is despite the mass discounting by supermarkets.

Chris Williamson, chief economist at Markit, says: ‘Inflation should drop further in 2012, potentially quite sharply. The increase in VAT from 17.5% to 20% last January should fall out of the year-on-year comparisons, which on its own should shave 1% or more off the annual rate. At the same time, food, clothing and energy prices are now all falling, suggesting a broad-based lowering of price pressures which should have a marked downward effect on the headline rate of inflation in coming months.’

In fact, the most gung-ho forecasters reckon we could meet the Bank of England’s target 2% rate by the end of the year, all things being equal. But things rarely are. The strife in the eurozone could push up sterling, there may be a global softening in commodities demand as Chinese growth slows, the UK's high unemployment rates still threaten our economy, and the instability in the oil markets continues to wreak havoc with inflationary predictions - tension in the Gulf is threatening to push up the cost of crude.

Overall, it's a very noisy picture so watch this space.

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