Inflation falls to 3.6%
INFLATION fell for the fourth month in a row in January, new figures show.
The CPI inflation rate fell to 3.6%, down from 4.2% in December as the impact of last year’s VAT rise dropped out of the year on year comparison.
The headline rate has been declining since hitting a three year high of 5.2% in September and is expected to continue to fall through much of 2012.
Last week’s decision by the Monetary Policy Committee to start a fresh round of quantitative easing was driven by concerns that the inflation rate could drop below the Bank of England’s 2% target.
January’s inflation reading – the lowest since November 2010 – is in line with BoE forecasts for inflation to average just over 3.4 percent in the first three months of 2012.
The broader retail price index measure of inflation, which is often used in wage negotiations, fell to 3.9% from 4.8%, its lowest since February 2010.
Dr Brian Sloan, chief economist at Greater Manchester Chamber of Commerce, said: “Although the consumer prices index fell to 3.6% it remains well above the typical wage increase of around 2% so the squeeze on households will continue.
“Further falls are likely in the coming months, but after seeing commodity prices fall over the last year recent increases since the start of the year and the encouraging signs of a global pick up suggests these will probably rise over the coming months.
“As a result we do not see an undershoot of the 2% inflation target as being harmful as it will only be temporary. More needs to be done to support business confidence to stimulate investment and job creation.”
Jack Stopforth, chief executive at Liverpool Chamber of Commerce, said: “Falling inflation will help reduce the squeeze on businesses, make it easier for consumer spending to rise, and reassure the MPC about its recent decision to increase QE to £325bn.
“But we now need more forceful measures to support growth in the economy. The government must announce a substantive credit-easing plan as soon as possible to improve the flow of lending to businesses.
“The idea of an SME bank should also be seriously considered given the difficulties that small firms are facing in obtaining credit on reasonable terms.”
Prof Michael Luger, Dean of Manchester Business School, said the drop “reflects the ongoing weakness of the economy which relieves pressure on prices in general, particularly in the cost of labour”.
“Since wage growth has been anaemic, significant inflation reduces consumers’ buying power. As prices now flatten there will be a psychological lift for consumers, boding well for beleaguered retailers.
“Economists talk about a ‘misery index’, which is the sum of the inflation and unemployment rates. Unemployment rates are not abating yet, so the decline in the inflation figure, at least, allows that misery index to begin to fall.”
