Inflation falls sharply to 3.6%
Inflation fell sharply last month to a 14-month low of 3.6%, according to figures from the Office for National Statistics (ONS).
The retail prices index (RPI), which includes mortgage interest payments, also fell from 4.8% to 3.9%.
The main reason for the sharp drop-off is that last January's VAT rise from 17.5% to 20% has now been fully included in annual inflation comparisons, so it is no longer skewing the data.
Stable petrol prices and a fall in energy bills have also helped bringing inflation down.
Good news for families
"Inflation fell significantly in January for the second month in a row, which is good news for family budgets. The Bank of England and other forecasters expect inflation to keep falling through this year, providing additional relief," says a spokesperson for the Treasury.
However, other commentators disagree.
"Part of the latest fall in inflation can be attributed to falling utility and fuel prices, which though welcome, can hardly be relied upon in future months," says Ranvir Singh, chief executive of the market analysts RANsquawk.
"Optimists are now forecasting that CPI could tumble to the Bank of England's target rate of 2% in time for this summer's London Olympics.
"But even if inflation does continue to freefall, there is no guarantee that it'll be matched by economic growth. And as tomorrow's unemployment figures are likely to confirm, the persistently weak labour market and tight credit conditions will continue to hold back consumer spending," Singh warns.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).