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Inflation falls sharply in December

Inflation fell sharply in December, supporting Bank of England forecasts for a hefty decline in 2012, due to lower fuel prices and high-street clothes discounting, official data showed on Tuesday.

The Office for National Statistics said consumer price inflation fell to 4.2 percent in December from 4.8 percent in November, as the decline in inflation from its three-year peak of 5.2 percent in September gathers pace. This was the sharpest drop in the annual rate since April 2009, when the economy was deep in recession.

Inflation is still well above the Bank's 2 percent target, but the central bank forecasts that it will be undershooting 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.

Clear evidence of falling inflation is also a precondition for several members of the Bank's Monetary Policy Committee to back a continuation of quantitative easing asset purchases.

The ONS said that December's fall in inflation to a six-month low was due to a reversal of some of the factors that pushed inflation up in December 2010.

Clothes shops in particular started discounting before Christmas to lure cash-strapped consumers, unlike in 2010 when some raised prices in anticipation of a January 2011 rise in sales tax. And upward pressures from energy prices eased, taking the rate of inflation for transport to its lowest in more than a year. Fuel prices fell 0.6 percent on the month.

These trends look likely to persist in 2012. Major utilities have announced price cuts of about 5 percent to their gas and electricity prices, while Britain's biggest retailer Tesco warned investors last week to expect flat profits this year as it reduces prices.

The ONS said that there was little evidence of supermarkets discounting food heavily in the run-up to Christmas, but alcohol prices showed a record monthly fall.

Moreover, last week producer prices also fell for the first time in 1-1/2 years in December and several business surveys also pointed to fading cost pressures.

Nonetheless, it will take several months for economists to be sure that inflation will fall back to target.

The drop at the start of the year due to fading one-off effects will make it hard to see the underlying price pressures. And Britain remains vulnerable to any depreciation in sterling or spike in oil prices.

Source : David Milliken & Sven Egenter – Reuters

17 January 2012
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