The UK's annual rate of inflation dropped in January to its lowest level since April last year, thanks to fuel prices falling at the fastest pace on record, official figures showed today.
The key Consumer Prices Index (CPI) measure of inflation dropped to 3% from 3.1% in December, with falling car and transport prices also acting as a drag, the Office for National Statistics (ONS) said.
But the fall was far lower than expected by economists as January sales on the high street failed to see the same level of heavy discounting as last year.
The ONS said retailers cut prices by less after unusually heavy discounting in December 2008, while it added alcohol prices were also hiked across wine, beer and spirits.
Retail Prices Index (RPI) inflation — which includes mortgage costs — showed a much larger fall, plunging from 0.9% in December to 0.1% in January, marking the lowest level for nearly 49 years.
RPI has not been lower since March 1960, when it fell by 0.5%.
Economists predict that RPI will soon sink into negative territory as the recession tightens its grip.
It is also feared that CPI — the official measure of inflation — could turn negative in what would effectively be classed as deflation.
The Bank of England warned in its grim quarterly forecast last week that the UK would only narrowly avoid deflation.
It believes CPI will reach as low as 0.5% this year and remain well below its 2% target until 2012, even with interest rates cut further from their already historic low of 1%.
Mervyn King, Governor of the bank, also hinted that policymakers would imminently resort to quantitative easing tactics — where money supply is increased — alongside rate cuts to ward off deflation.
Sinking oil prices have brought annual fuel inflation down to its lowest level since the ONS began recording data in 1997, to minus 15.2% in January.
The average price of petrol fell by 2.9p a litre to 86.3p between December and January, according to the ONS. RPI is also being dragged lower by the recent rapid and hefty reductions in interest rates.
However, there were unexpected upward pressures on inflation, such as alcohol prices rising to their highest level in nearly eight years.
Recreation and culture likewise rose last month, with the price of toys and games higher after steep price cutting in December and increases seen across overseas holidays and books. Despite today's smaller-than-expected drop, economists are still predicting that CPI inflation could turn |negative, possibly by the autumn of this year.
ING economist James Knightley said: “We continue to look for large falls in inflation over the coming months. Petrol prices have further to fall in year-on-year terms while recent utility bill tariff cuts will also be a big help in lowering inflation. The recession will intensify competitive price cuts as businesses compete for customers.”