UK inflation rate falls to 14-month low of 3.6%

It is seen as a further sign that the crippling consumer spending squeeze is loosening its grip

The consumer prices index (CPI) rate of inflation fell to 3.6 per cent last month, from 4.2 per cent in December, as the previous year’s VAT hike from 17.5 per cent to 20 per cent fell out of the year-on-year comparison.

In a letter of explanation to the Chancellor, Bank of England governor Sir Mervyn King said further falls in petrol and utility prices are on the way and added: “The effect of the factors that temporarily pushed up inflation is now waning.”

But economists warned that the softer cost of living is likely to weigh down on already sluggish wage growth, which at 1.9 per cent is nearly half the rate of inflation.

TUC general secretary Brendan Barber said: “With prices still increasing twice as fast as wages, workers are still getting poorer month by month while high unemployment and wage stagnation persists.”

The CPI rate has now fallen 1.2 percentage points since November, the largest fall over two consecutive months in just over three years.

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

The data add further weight to the Bank’s decision last week to pump an extra £50 billion into the economy through its quantitative easing programme.

The VAT effect had a pronounced impact on transport costs, which applied the greatest downward pressure to overall prices in January, as they fell 0.7 per cent.

The fall was also driven by softer rises in the cost of crude oil, which led to lower price increases in petrol and diesel, new car sales and maintenance.

The average price of petrol at the pumps in January rose by 0.6p per litre, compared with a 5.4p rise last year, to £1.33 per litre. Diesel was up 0.7p, compared with a 5.8p rise, at £1.41 per litre.

The VAT hike had a significant impact on the prices charged by restaurants and hotels, with costs little changed this year.

Food prices were broadly flat on the month and had a slight downward impact on the overall rate of inflation.

But a softer drop in clothing and footwear prices provided some resistance to the fall in the overall rate of inflation.

Clothing costs fell by 4.9 per cent in January, compared with a 5.9 per cent drop in 2011, as discounting and promotion were introduced earlier to tempt hard-pressed consumers in the run-up to Christmas.

Other measures of inflation also fell, with the retail prices index (RPI) dropping to 3.9 per cent in January from 4.8 per cent in December, its lowest level in just under two years.

A Treasury spokesman said: “Inflation fell significantly in January for the second month in a row, which is good news for family budgets. The Bank of England and other forecasters expect inflation to keep falling through this year, providing additional relief.”