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Drop in CPI inflation rate expected

Inflation is expected to have edged lower in November as falling petrol prices and the supermarket price war keep a lid on the cost of living.

Economists expect the Consumer Price Index (CPI) measure of inflation to drop back to a match a recent five-year low of 1.2%, from 1.3% in October, when figures are published by the Office for National Statistics (ONS).

The Bank of England believes CPI is likely to fall below 1% in the coming months, meaning governor Mark Carney will have to write a letter of explanation to Chancellor George Osborne.

Lower inflation will cheer hard-pressed householders squeezed for years by faltering wage growth. It also gives the Bank leeway to leave historically low interest rates on hold at 0.5%, keeping the pressure off borrowers.

But a rate below 1% threatens to bring the UK uncomfortably closer to the eurozone scenario where a damaging deflationary spiral is feared.

UK inflation was at 1.2% in September, its lowest level since September 2009, but rose to 1.3% in October, partly as a result of new computer games released in the run-up to Christmas.

Howard Archer, chief UK and European economist at IHS Global Insight, said CPI was expected to have fallen back to 1.2% in November. Economists at Investec expect a 1.1% rate.

Alan Clarke of Scotiabank forecast a 1.2% reading. But he added: "Food is likely to be the joker in the pack. Food prices typically rise by a reasonable margin in both November and December in the build-up to Christmas.

"However, the ongoing supermarket price war could hold prices lower than the seasonal norm and contribute to a downward surprise."

Mr Clarke predicted a steeper plunge in December's figures, published next month, when the slide in oil prices to five-year lows feeding through to petrol pump costs takes effect in the data.

It will also reflect a lack of energy price hikes this winter compared to a 10% increase last year, he said.

"We expect CPI inflation to remain below 1% through to July, hence the Governor of the BoE is likely to write at least two letters to George Osborne to explain the inflation target undershoot and possibly even a third letter," said Mr Clarke.

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