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UK Inflation Continues to Fall

17 December 2008

Figures released today show that inflation fell again in November marking two consecutive falls from its September peak. The annual rate of growth in consumer prices fell significantly to 4.1 per cent from 4.5 per cent in October and 5.2 per cent in September. Consumer prices contracted on a month-on-month basis for the second consecutive month falling by 0.1% from October to November.

The largest contributor to the monthly fall was transportation costs again as fuel prices fell this November but rose last November. Specifically, petrol and diesel fell by 9.3 pence and 7.5 pence between October and November this year while last year they rose by 3.5 pence and 5.0 pence respectively. Housing and household services also contributed to the fall in inflation and again it was largely fuel related as heating oil fell this year compared with a rise last year.

Food and non-alcoholic beverages provided the largest upward contribution to the change in the inflation rate. Significantly, fruit and vegetable prices increased by more than a year ago. However, some foods including milk, cheese and eggs, and break and cereals, had lower price increases than last year to temper the effect of fruit and vegetable prices.

Figures also show that the inflation rate for retail prices fell even more sharply than consumer prices. The annual rate of growth for the all items retail prices index plunged to 3.0 per cent in November from 4.2 per cent in October – the largest fall since 1991. In addition to falling petrol and oil prices, declining housing costs contributed to the sharp fall in the retail prices inflation rate. Specifically, the 50 basis point cut in the Bank of England base rate in October was largely passed on by lenders and house prices significantly depreciated as measured by the smoothed Department of Communities and Local Government house price index used for the retail prices index calculation.

Today’s fall reinforces the concerns that inflation will continue to descend and eventually lead to a deflationary spiral. It remains to be seen if consumers will eventually expect deflation and correspondingly delay purchases in hopes of lower prices. In the meantime, the falling inflation rate allows the Bank of England greater scope to lower the base rate to record lows. A consequence of such significant cuts will be further devaluation of sterling. Indeed the market expectation of forthcoming cuts has dropped the pound to another record low today.

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