UK inflation rate drops

Inflation fell sharply in December, supporting Bank of England forecasts for a hefty decline in 2012, due to lower fuel prices and high-street clothes discounting, official data showed.

The Office for National Statistics said consumer price inflation fell to 4.2 per cent in December from 4.8 per cent in November, as the decline in inflation from its three-year peak of 5.2 per cent in September gathers pace.

This was the sharpest drop in the annual rate since April 2009, when the economy was deep in recession.

Inflation is still well above the Bank's two per cent target, but the central bank forecasts that it will be undershooting by the end of 2012, as economic weakness weighs on prices and the effect of 2011's rises in sales tax and energy prices fade.

Clear evidence of falling inflation is also a precondition for several members of the Bank's Monetary Policy Committee to back a continuation of quantitative easing asset purchases.

The ONS said that December's fall in inflation to a six-month low was due to a reversal of some of the factors that pushed inflation up in December 2010.

Clothes shops in particular started discounting before Christmas to lure cash-strapped consumers, unlike in 2010 when some raised prices in anticipation of a January 2011 rise in sales tax.

And upward pressures from energy prices eased, taking the rate of inflation for transport to its lowest in more than a year. Fuel prices fell 0.6 per cent on the month.

These trends look likely to persist in 2012. Major utilities have announced price cuts of about five per cent to their gas and electricity prices, while Britain's biggest retailer Tesco warned investors last week to expect flat profits this year as it reduces prices.