Inflation slows in October

15 November 2011

After hitting record highs in September inflation has slowed slightly in October. The consumer prices index (CPI) measure of inflation fell to 5.0% in October, down from 5.2% in September.

At the same time, the retail prices index (RPI), which includes council tax and mortgage payments, slowed from 5.60% to 5.40%.

The drop comes following a month of falling food prices due to a price war between the supermarkets and drops in airfares and petrol prices. Unfortunately, the fall wasn't larger due to the rising cost of clothing, electricity and gas, according to the Office for National Statistics.

Inflation may have fallen slightly but "it's far too early for savers and pensioners - and people generally - to hang out the bunting," says William Hunter of Hunter Wealth Management. "If there's one trend in the current environment, it's the volatility of monthly figures. One month's rise can be followed by a fall and vice versa."

Despite the drop, both figures remain incredibly high – they are more than double the Bank of England's target for inflation, which is 2%.

Little improvement for households

The small fall in inflation will do little to curb the problems facing most households – balancing rising bills with stagnant salaries. Research from reveals that people are spending 27% of their income on essential bills such as utilities, telecoms and insurance.

"Although inflation fell this month it is still high. This combined with salary freezes across many industries, means it's no wonder many households are spending such a huge proportion of their income on essential bills," says Kevin Mountford, head of banking at

"Once other costs such as mortgage/rent payments, debt repayment and transport costs are factored in, many British consumers are left with very little money to play with each month."

The picture is also grim for savers.

"The small drop in inflation announced today will not be enough to curb the woes of the nation's savers," says Sylvia Waycot, spokesperson for Moneyfacts. At the current rate of inflation, a basic-rate taxpayer would need an account paying 6.25% to beat inflation and a 40%-rate taxpayer would need to find an 8.33% interest rate. Neither of these exist. The best option available to savers is an inflation-linked account.

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Light relief

There is one group who will greet the small fall in inflation with jubilation – the Bank of England's monetary policy committee; the drop relieves pressure on Bank governor Mervyn King to tackle inflation.

James Igoe, private client director at stockbroker XCAP, says: "Mervyn King will rightly feel more justified in keeping his anti-inflationary weapons firmly in their cabinet for a while longer."

But the good times for Mervyn are unlikely to last. The major factor behind this month's inflation drop is the aggressive price war taking place between the supermarkets and that can't last forever.


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