Business

UK inflation rate falls to 3.6% in January

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Media captionPhil Gooding from the ONS said previous inflationary pressures caused by VAT were not repeated this year

Inflation fell sharply in January as the impact of last year's VAT rise was no longer shown in the figures.

The Consumer Prices Index (CPI) measure of inflation fell to 3.6% in January, down from 4.2% in December, according to the Office for National Statistics.

Retail Prices Index (RPI) inflation - including mortgage interest payments - fell to 3.9% from 4.8%.

VAT went up from 17.5% to 20% in January 2011, pushing up the annual inflation rates that year as a result.

The drop brings CPI inflation to a 14-month low. However, the rate remains well above the Bank of England's 2% target.

The prime minister welcomed the drop in the rate.

"Inflation is coming down and that is good news, as the cost of living is the most important issue facing families up and down the country," David Cameron said.

However, Labour argued that prices remained high.

"For ordinary families right up and down throughout the country, the fact is prices went up last year, they've stayed up... and incomes of course haven't risen at all," said shadow treasury minister Owen Smith.

The latest figures from the ONS showed pay rising at a rate of 1.9%.

Letter

The 3.6% rate meant the governor of the Bank of England, Mervyn King, had to write a letter to the chancellor explaining why the rate was more than one percentage point above target.

Sir Mervyn King said inflation was likely to continue to fall - justifying the bank's decision last week to inject an extra £50bn into the economy through quantitative easing.

"In coming months, that further moderation is likely to reflect the declining contributions from petrol prices and any remaining VAT impact, together with recently announced cuts to domestic energy prices," he wrote.

"Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high," he added.

The bank is due to publish its latest quarterly inflation and growth forecasts on Wednesday.

Falling expectations

In addition to the impact of VAT, smaller increases in the cost of commodities and oil than seen a year earlier also helped to bring the inflation rate down, according to the ONS.

The average price of petrol in January rose by 0.6p a litre, compared with a 5.4p rise last year.

Diesel was up 0.7p a litre, compared with a 5.8p rise in January 2011.

The month-on-month comparison showed small falls in the cost of clothing and footwear, furniture and household goods and transport whilst alcohol, household services and health rose slightly.

Analysts say CPI inflation could fall below the 2% target by the end of the year, driven by lower agricultural and commodity prices.

"Inflation expectations tend to follow actual inflation and, given that the CPI appears to be heading sharply lower, we expect inflation expectations to do likewise," James Knightley from ING bank.

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