Rate of inflation expected to drop

Updated: 
Sir Mervyn KingThe rate of inflation is expected to drop to its lowest level in two years, in a sign that the pressure on cash-strapped households has started to ease.

The consumer prices index (CPI) rate of inflation is forecast to drop to 3.5% in January, from 4.2% in December, as the previous year's VAT hike from 17.5% to 20% fell out of the year-on-year comparison.

While the cost of living is easing in the right direction, Bank of England governor Sir Mervyn King will still be forced to pen a letter of explanation to the Chancellor as the rate will be more than a percentage point away from the Government's 2% target.

But falling CPI figures will add further weight to the Bank's decision last week to pump an extra £50 billion into the economy through its quantitative easing programme.

Chris Williamson, chief economist at financial services information firm Markit, said: "Inflation is likely to have cooled markedly from the 4.2% rate seen in December, as the VAT hike of a year earlier falls out of the year-on-year comparison."

The figures will be released a day ahead of the Bank's quarterly inflation report, which is expected to confirm its belief that inflation will hit the 2% target and possibly fall further in early 2013.

Elsewhere, the figures released by the Office for National Statistics (ONS) are expected to show price pressures from oil, other commodities and food easing as they were rising significantly in early 2011.

However, some economists warned January's CPI drop may have been limited as retailers started discounting earlier in the turn-of-the-year clearance sales than the previous year, bringing forward the impact that will have on the rate of inflation.

The British Retail Consortium (BRC) reported that overall annual shop price inflation eased to a 22-month low of 1.4% in January, from 1.7% in December.

Non-food prices were flat year-on-year in January, while food price inflation retreated to an 18-month low of 3.7%, reflecting heavy discounting, particularly in supermarkets.

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