Consumer inflation set to fall

Consumer inflation set to fall

Official figures due out later on Tuesday are expected to show that UK inflation fell to 4.8% in October.

The Consumer Prices Index (CPI) measure reached 5.2% in September. This was the highest level for 16 years.

The Retail Prices Index, (RPI) the alternative measure of inflation, which includes housing costs, is forecast to fall from 5.2% to 4.6%

The Bank of England has said inflation could fall below its target of 2% next year – and might drop as low as 1%.

This year, the UK economy shrank for the first time since 1992 – falling by 0.5% in the third quarter of 2008.

This led the Bank of England to lower its key Bank Rate in October by 1.5 percentage points – to 3% from 4.5% – its lowest level since 1955.

The impact of the rapidly-slowing UK economy is pulling down cost-of-living increases thanks to falling food and fuel prices – the latter helped by crude oil prices remaining under $60 a barrel.

UK inflation figures, which will be published at 0930 on Tuesday are likely to confirm this trend.

Deflation ‘likely’

Figures from the Office for National Statistics, show that output prices – the price of goods leaving the factory – dropped by 1% in October.

Input prices – the cost of raw materials purchased by the manufacturers – dropped by 5.6% in October, the biggest drop since 1986.

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Mervyn King, the Governor of the Bank of England, says it is now “very likely” that the UK’s retail price index will turn negative next year.

The Bank is expected to cut rates again in December, say economists, perhaps by a full percentage point to 2% , a level not seen since the 1930s.

A short period of deflation – where prices fall in real terms rather than rise – would not be a disaster, but a longer period of falling prices might be, say economists.

In prolonged periods of deflation, consumers hold off buying goods, reckoning they will be cheaper later on, according to economic theory.

This can lead to further falls in demand and output. As firms sell less, they respond by cutting jobs or cutting wages.

Overall consumers then have less money to spend – and demand falls yet again.

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This article is from the BBC News website. © British Broadcasting Corporation