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Inflation continues to fall

Consumer Price Index (CPI) inflation has fallen for the second month running to reach 4.8% in November, from 5.0% in October. There was also a fall in the Retail Prices Index (RPI), which includes mortgage interest payments, to 5.2% from 5.4%.

Increased supermarket competition has helped lower the inflation rate

Factors accounting for the fall in the rate of inflation include a slowdown in food and non-alcoholic drink prices, increased price competition by supermarkets and lower petrol costs. But the CPI figure is still well above the Bank of England’s target rate of 2%. Fortunately, there are factors already in place which will see the inflation fall early next year, especially the fact that the rise in VAT which came in last January, will move out of the annual comparison. There should also be a fall in food and energy inflation, and some forecasters believe that CPI inflation will fall to 3% by the end of the first quarter. The Bank has forecast that the figure will drop to 1.5% by the middle of next year, but that may well be unduly optimistic.

Energy prices are currently rising at an annual rate of 20.9% according to the ONS, which is the fastest rate of increase since February 2009. We also need to look at the comparison between a 5% current inflation rate and average earnings growth of 2.3%. This means that most households are suffering a continuing fall in real incomes. Given that consumer spending makes up about two-thirds of all UK spending, this is not going to be a driver of economic growth.

When we add this effect onto the cuts in public spending and our poor export performance, we may well see the economy dipping back into recession next year.

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Posted in Consumer Price Index, Inflation

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