Cost of living starts to slow

Woman shopping for a dress

Inflation appears to have peaked with the cost of living standing at 4.5% during October, down from 5.2% in September.

The Consumer Price Index (CPI) – the official measure of inflation – has been steadily rising all year well beyond its target of 2%, largely as a result of higher crude oil and food prices. However, with crude oil costs falling since August, and food prices also on the way down, the CPI is also falling.

The Office for National Statistics (ONS), which publishes the figure, says that cheaper fuel is one of the biggest factors bringing inflation back down. The average price of petrol fell by 7.1p per litre between September and October, to stand at 104.5p, compared with a rise of 2.7p last year.

Cheaper fuel has resulted in a large fall in the cost of transport including air and sea travel. In addition, the falling cost of food and non-alcoholic beverages has also helped calm inflation.

The Retail Price Index (RPI) – which includes mortgage interest payments – also slowed in October to 4.7% from 5.5% in September. The fall was largely down to cheaper motoring costs, as well as falling house prices.

Jonathan Loynes, chief European economist at Capital Economics, says the dip in inflation could result in prices actually falling with the first period of deflation in more than 60 years.

“We had been prepared for the core rate to rise in October and over the following few months as previous sharp cost increases continue to feed into the high street. But it looks like strong competitive pressures and the slowdown in demand might be preventing that from happening – seriously bad news for retailers’ profit margins.

“Overall, great figures which support our view that CPI inflation will turn negative in about a year’s time.”

Despite the cost of living appearing to be starting to slow, CPI remains well above its 2% target. And households hit by higher energy bills and food prices during 2008 may not see much benefit from lower inflation just yet.