Inflation deflates to 4.8%

Phew - the Retail Prices Index has dropped below 5% just in time for the big Christmas shop. It might even keep falling...

by Emma Haslett
Last Updated: 06 Nov 2012
An early Christmas present for Santa, who has presumably been eyeing his wallet just as nervously as the rest of us: the retail price index, the standard measure of inflation, fell from 5% in October to 4.8% in November, according to official figures from the Office for National Statistics. That’s excellent news for shoppers, who have suffered as prices rose while wages stayed the same. Even the Consumer Prices Index, which includes mortgage payments, fell to 5.2%, from 5.4% the month before. Admittedly, both of those are still well above the 2% target set by the Government for the Bank of England. But at least it gives us a bit of hope.

The ONS reckons most of the fall has been caused by a sudden slowdown in the ever-ballooning prices of food and non-alcoholic drinks. Smaller rises in the prices of transport, furniture and clothing has also contributed. Figures from the ONS last week also suggested that the price of goods made by manufacturers aren’t rising as fast as they were – which we’d imagine took its toll on inflation, too.

On the surface of it, then, things are looking up: in fact, it almost looks as if the Bank of England’s prediction that inflation will fall to 2% – below, even – within 18 months may actually come true.

Scratch that surface, though, a little and things look less optimistic. For a start, most of the fall in food prices was mainly down to competitive cost-cutting between supermarkets, which, in many areas, have squeezed their margins to near-unsustainable levels. Just look at results announced last week by Tesco, which admitted that its Big Price Drop campaign had ‘put significant deflation into our sales’.

It’s a similar story with clothing: because the warm autumn dampened the demand for winter woolies, many retailers decided to start their sales early, pushing down the price of clothing. So while this fall in inflation looks encouraging to all those whose wallets are threatening to implode, at the moment, the driving forces behind it are artificial, and therefore not necessarily sustainable.

That said, the Bank of England’s prediction that things should start to level out isn’t entirely pie in the sky. One of the main factors behind any drop in the new year will be the Government’s VAT rise, which was introduced in January, and should therefore stop having an upward effect on inflation (which is measured year-on-year) early in 2012. The price of fuel also rose by a whopping 20.9% in November, its fastest since February 2009 – so assuming that slows down, it should have a downward effect on inflation, too.
 
Tellingly, analysts certainly don’t seem especially concerned. As Vicky Redwood of Capital Economics pointed out, ‘November’s UK inflation figures provide further hope that inflation has now passed its peak and could soon fall pretty sharply... Come January… it should start to fall like a stone,’ she said. In fact, she seemed concerned it could drop too fast: ‘We think that inflation will be below its target by the autumn, before dropping to 1% or lower.’ Well, at least that’s something new to worry about…

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