Inflation rate falls: Store discounts and VAT cut cause steep drop

Published on Tuesday 20 January 2009 09:53

HEAVY discounting on the high street and the reduction in VAT caused the biggest fall in inflation last month since the recession of the early 1990s, official figures revealed today.

The fall in the annual rate of UK inflation – as measured by the Consumer Prices Index (CPI) – fell to 3.1% from 4.1% in December, according to the Office for National Statistics (ONS).

The drop also marked the first time inflation fell in December since records began, said the ONS.

The fall in CPI is less than experts were expecting, with many pencilling in a drop to as low as 2.6%.

But the decrease will heighten fears over deflation as the impending recession is expected to see further falls over the year ahead.

CPI has fallen significantly from a peak of 5.2% last September.

And the Retail Prices Index (RPI) last month fell at its fastest rate in more than 28 years, as house price declines and the recent dramatic interest rate cuts added to the VAT impact.

RPI, which includes mortgage interest payments, plunged to 0.9% in December from 3% the previous month.

The ONS said the cut in VAT had the biggest effect on inflation, knocking 1% off CPI in December, with greater early Christmas discounting adding to the fall.

Two-thirds of retail prices saw the Government's cut in VAT from 17.5% to 15% passed on last month, added the ONS.

Cut-price promotions saw clothing and footwear deflation of 10.3% last month – its lowest level since official records began in January 1997.

More falls in the price of fuel also combined to knock CPI lower, with the annual rate of fuel deflation at 11.2%.