UK inflation rate lowest in over a year

The consumer prices index dropped more than half a point in January.

UK inflation fell in January to its lowest level since November 2010, dropping 0.6 percentage points from December to 3.6 per cent, according to Consumer Prices Index (CPI) figures released by the Office of National Statistics on Tuesday.

The drop in the annual rate reflects upward price pressures from the VAT tax December 2010 to January 2011, coupled with no similar price pressures December 2011 to January 2012.

"We're starting to get to that point where some of the noise that has affected inflation numbers is starting to fade," David Fenton, senior economist at RBS Group, told the New Statesman. "It's always interesting to see that 3.6 per cent is very much the average across the entire basket, but you do see fairly wide market variability."

The retail price index saw an even larger decline in January, falling nearly one percentage point from 4.8 per cent in December to 3.9 per cent.

Despite inflation being at a 14-month low, the rate is still more than one percentage point above the 2 per cent target set by the Bank of England.

UK Chancellor of the Exchequer George Osborne wrote, in a letter Tuesday to Bank of England Governor Mervyn King:

Although inflation is now falling broadly as expected, the process of rebalancing has a long way to go. I note and agree with this analysis.

The Bank believes inflation will reach that 2 per cent target by the end of the year, and RBS Group's forecast is the same.

"That should provide some relief for households, and it makes the squeeze on real take home pay less intense," said Fenton, of the predicted further drop in prices.

Inflation has fallen sharply over the past four months, down from a three-year high of 5.2 per cent in September 2011.