Inflation falls drastically to 1.1 per cent

Inflation falls drastically to 1.1 per cent

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Tuesday, 13, Oct 2009 10:27

By Richard James.

The consumer prices index (CPI), a key measure of inflation, has fallen to its lowest level since September 2004.

Figures released by the Office for National Statistics (ONS) show CPI dropped to an annual rate of 1.1 per cent last month, down from 1.6 per cent in August.

The Retail Prices Index (RPI) also fell to -1.4 per cent from -1.3 per cent.

Economists had predicted CPI to stand at 1.3 per cent but the increased drop has been blamed on energy bills which rose sharply on last year but held firm this year.

If the index falls below one per cent the Bank of England governor Mervyn King will have to write to chancellor Alistair Darling.

The Bank and the Treasury are keen to avoid a continuing decline in inflation which would see prices drop, thereby reducing profits, fuelling a continuing downward spiral of deeper recession and increased unemployment.

Commenting on today's figures, economist Howard Archer from IHS Global Insight, said: "The drop in inflation in September was primarily due to utility bills falling year-on-year as well as moderating food prices. This outweighed higher transport costs which were pushed up by September's rise in fuel tax.

"However, core inflation remained stickier, only edging down to 1.7 per cent in September from 1.8 per cent in August, suggesting that sterling's weakness continues to have a significant upward impact on prices.

"September will probably prove the floor in annual consumer price inflation as oil prices fell back very sharply in the final months of 2008 and in early 2009 which means that base effects will be unfavourable over the coming months.

"Furthermore, Value-Added Tax was cut from 17.5 per cent to 15.0 per cent in December 2008 but will rise back up to 17.5 per cent in January 2010, which will push the annual inflation rate up from this December. Finally, sterling's weakness is likely to have some further upward impact on inflation in the near term at least."