UK inflation falls sharply on cheaper fuel, clothes

LONDON, Jan 17 – British inflation fell sharply in December as fuel prices dropped and retailers lured customers with hefty discounts for clothes, providing cash-strapped households with some relief and the Bank of England with more leeway to ease policy further.

Policymakers are banking heavily on a steep fall in inflation to ease the squeeze on Britons’ budgets, allowing them to step up spending this year and support an economy that is on the verge of recession due to the euro zone debt crisis.

Consumer price inflation fell to 4.2 per cent in December from 4.8 per cent in November, the Office for National Statistics said today, showing the decline in inflation from its three-year peak of 5.2 per cent in September is gathering pace.

It was the sharpest drop in the annual rate since April 2009, when the economy was deep in recession.
“We expect inflation to be back at the 2 per cent target by this autumn, and – while we’re not convinced that it will fall back as far as the Bank of England forecasts – there should still be plenty of room to loosen monetary policy further in 2012,” said Ernst & Young Item Club economist Nida Ali.

“This will also provide some welcome respite for hard-pressed families who have struggled with falling real wages for much of the past five years,” Ali said.

Inflation is still well above the BoE’s 2 per cent target, but the central bank forecasts that it will be below this by the end of 2012, as economic weakness weighs on prices and the effect of 2011’s rises in sales tax and energy prices fade.