Inflation falls again to 4.2%

17 January 2012

The consumer prices index (CPI) measure of inflation in the UK fell to 4.2% in December, down from 4.8% in November, according to the Office for National Statistics (ONS).

The retail prices index (RPI) measure - which includes mortgage interest payments - also fell, from 5.2% in November to 4.8% in December.

CPI is now at its lowest rate since June 2011, with the fall attributed to lower fuel prices and cheaper clothing.

Ruthless price cutting

Ranvir Singh, chief executive of market analyst RANsquawk, believes the "ruthless price cutting" on the high street is to thank for the falling rate of inflation.

"Today's figures are of course welcome. But with most economists predicting further stagnation or even a technical recession in 2012, falling inflation may have little more than a palliative effect," he says.

He comments that with weak consumer demand, the pressure to keep prices down will continue, citing the recent price cuts from the 'big six' energy suppliers as evidence.

Singh adds: "While inflation is still well above the Bank of England's target level, such a big fall will make the the the governor much more inclined to dig out his quantitative easing (QE) gun from the cabinet once again.

"It's now highly likely that he'll announce a third dose of QE along with the Bank's next quarterly inflation report next month."

Tom Paterson, chief economist at Gold Made Simple, cautions that the lower figures are not a "green light" to begin another round of QE, adding that the energy companies and retailers' price cuts have "distorted inflation in the short term".

"There needs to be a degree of reflection before any immediate decisions are made to pump more money into the system," he says.

He adds: "Whilst we could well see inflation tick lower for the next few months, with the possibility of energy companies cutting prices further and retailers extending their discounting beyond the January sales, the possibility that CPI will be anywhere near the 2% target a year from now, as confidently predicted by the Bank of England, is a fanciful one."

"The best we can hope for is that inflation sees a steady but controlled decline over the next 12 months, ending the year at less painful levels."

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