Cost of living starts to fall as supermarket price war cuts inflation

The Consumer Price Index (CPI) rate of inflation fell to 5 per cent in October, the Office for National Statistics (ONS) said, slightly down on the three-year high of 5.2 per cent recorded in September.

Falls in the price of food, air transport and fuel, helped push the inflation rate down for the first time since June, although it still remains well above the Bank of England’s target of 2 per cent.

“Significant and widespread discounting” by supermarkets, as well as a strong harvest for some produce, saw the biggest fall in food prices for a September to October period since 1996, the Office of National Statistics said yesterday.

Economists said the slight drop suggested that inflation had peaked and was likely to fall steadily during next year.

David Kern, chief economist at the British Chambers of Commerce, said: “These figures support our view that inflation is probably past its peak, and a sharp decline can be expected during the course of 2012.”

Despite the slight drop, Bank of England Governor Sir Mervyn King was required to pen a letter of explanation to the Chancellor as inflation still remains more than double the government’s target.

Sir Mervyn, who issued the letter as he was formally knighted at Buckingham Palace, said that without temporary factors such as the impact of the VAT increase, inflation would be below 2 per cent and forecast that the rate will “fall back sharply in the next six months or so”.

According to Sir Mervyn, there is even the possibility of inflation undershooting the 2 per cent target due to “substantial risks around the global economic recovery and the implications of a further slowdown in the world economy for the UK”.

The glimmer of hope offered by falling inflation was accompanied by other economic indicators that suggested that there is to be more financial gloom as Christmas approaches.

The Scottish Retail Consortium KPMG retail sales monitor showed that October sales figures from the high street were 0.1 per cent down on last year’s. While like-for-like sales, which strip out factors such as new store openings were down by 1.5 per cent.

David McCorquodale, head of retail in Scotland for KPMG, said: “The success of the Christmas season for retailers hangs in the balance, as October’s results do not set a strong foundation.”

Scottish Retail Consortium director Ian Shearer said: “These figures are not a good start to the Christmas build-up.”

The slight fall in Consumer Price Index inflation – the most commonly used measure of inflation – was accompanied by a drop in the Retail Prices Index (RPI) inflation, which includes mortgage interest payments. RPI inflation fell from 5.6 per cent to 5.4 per cent.

The UK government acknowledged that inflation was still too high with a Treasury spokesman saying: “These are difficult times for households as prices continue to be affected by conditions in the global oil and gas markets.”

The marginally healthier inflation figure came after Tesco triggered a price war with its rivals in October with its £500 million Big Price Drop campaign, which saw the cost of 3,000 products cut. Sainsbury’s responded with its Brand Match campaign, while Asda slashed prices at the petrol pumps.

The moves saw vegetable prices fall 2.4 per cent, fruit ease 1.6 per cent, milk, cheese and eggs drop 1.2 per cent and meat edge down 0.7 per cent, the ONS said.

Elsewhere, a 6 per cent fall in air fares and a slight 0.4 per cent dip in petrol pump prices brought the overall CPI rate down. The average price of petrol was £1.34 a litre in October, the lowest since July.

Gas and electricity bills continued to apply the most significant upward pressure on the overall rate of inflation in October, rising 1.4 per cent and 1.5 per cent respectively.

The surge came as Npower introduced a price hike, following previous rises from British Gas, SSE, Scottish Power and E.ON. EDF, which increases bills this month, and will affect November’s inflation figures, the ONS said.