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UK inflation continues downward trend

The Momentum UK Team 14 February 2012

Inflation dropped to 3.6% in January according to latest figures from the Office for National Statistics (ONS), continuing the downward trend after November's three year peak at 5.2%.

The ONS said that the sharp drop was largely due to the fact that last year's VAT rise from 17.5% to 20% was no longer included in the figures.

Consumer Price Index inflation fell from 4.2% in December to 3.6% in January, while Retail Prices Index (RPI) inflation, which includes the measure of mortgage interest payments, fell from 4.8% to 3.9% across the same time period.

Nevertheless, the CPI rate of 3.6% remains well above the government target of 2%. Mervyn King, Governor of the Bank of England said that he expected inflation to drop to "around" the 2% target by the end of the year.

The latest figures are good news for shoppers as the price of goods and services come down. Pressure should also ease on earners and savers who have seen wages and interest lag behind inflation of late.

In a letter to the Chancellor, King wrote:

"The unwelcome combination of sluggish growth and high inflation over the past two years is a reflection of the need for the economy to rebalance following the financial crisis and associated deep recession, together with rises in the costs of energy and imports,"

"Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high."

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