Business

UK inflation rate falls to 4.2% in December

Pound notes
Image caption Retailers are struggling to part shoppers from their cash

Inflation fell sharply in December on the back of lower fuel and clothing prices.

Consumer Prices Index (CPI) inflation in the UK fell to 4.2% in December, down from 4.8% in November, according to the Office for National Statistics (ONS).

Retail Prices Index (RPI) inflation - including mortgage interest payments - fell to 4.8% from 5.2%.

It backs Bank of England predictions that inflation will be 2% by late 2012.

The drop in the CPI rate was the biggest monthly fall since April 2009, and the lowest rate since June 2011.

The figures reflected a 2.8% drop in the price of clothing and footwear as retailers cut prices to attract customers in the run-up to Christmas.

Fuel prices fell 0.6% on the month, although this month's gas and electricity cuts by the main suppliers have yet to take effect.

However, food prices rose by 1.4%, despite recent fierce competition between the main supermarket chains.

Downward trend

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Media captionPhil Gooding from the Office of National Statistics says the main downward effect came from petrol prices

Analyst Chris Williamson of Markit said: "Further falls are likely in coming months, reducing the squeeze on incomes seen last year and therefore providing a much-needed boost to economic growth in 2012.

"The data therefore add support to the Bank of England's expectation that inflation will drop below its 2% target by the end of the year."

Marchel Alexandrovich, analyst at Jefferies International, said: "The figure was bang in line with expectations. This is the beginning of a downward trend that will see inflation fall back towards 3% by springtime as the VAT rise drops out and energy prices fall."

"The inflation backdrop will improve going forward which will make it easier for the Bank of England to do more quantitative easing in the next couple of months."

The Bank of England expects to conclude its latest £75bn in asset purchases - known as quantitative easing, or QE - by early next month.

"Inflation still looks set to fall below its target further ahead and today's figures support our view that we will see more QE from the Bank of England next month in an attempt to prevent this," said Vicky Redwood, chief UK economist at Capital Economics.

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