Belfast Telegraph

Inflation's second monthly decrease welcomed

By Margaret Canning

The second consecutive monthly fall in the rate of inflation has been toasted by businesses hopeful that a squeeze on profits caused by rising prices could now be alleviated.

The consumer prices index (CPI) rate dropped to 3.6% in January from 4.2% in December as the impact of 2011's Vat increase vanished.

Inflation is expected to hit the Government's 2% target by the end of this year - though the fact that it remains above the target has now left Bank of England Governor Mervyn King having to write a letter explaining the rate to Chancellor George Osborne.

Wilfred Mitchell, the policy chair of the Federation of Small Business (FSB), said the rising cost of commodities and fuel had made 2011 a tough year for many businesses.

"Our research showed that 80% of small businesses saw the cost of running and trading increase in the last three months of 2011," he said. "We therefore welcome this 0.8% fall.

"Small businesses will be encouraged by the improving inflationary outlook, with last year's Vat increase now factored out of the equation and pressures from commodity and oil prices easing."

Northern Bank chief economist Angela McGowan said the Bank of England was using quantitative easing to ensure inflation did not fall too far below the 2% target.

It announced another £50bn injection into the economy last week, meaning the UK economy has seen £325bn in quantitative easing in the last two years.

Ms McGowan said: "Assuming inflation continues to fall back in the second half of the year as expected, then this relief for households combined with more quantitative easing from the central bank should provide that extra stimulus that the UK economy clearly needs for recovery."

But Ulster Bank economist Richard Ramsey said consumers were quite home and dry.

"Only when incomes rise at a faster rate than inflation will households start to claw back the standard of living they have lost, particularly over the last two years," he said.

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 of England's quarterly inflation report, which is expected to confirm its belief that inflation will hit the 2% target and possibly fall further in early 2013.


The rate to which the consumer prices index fell in January

Weekly Business Digest Newsletter

This week's business news headlines, directly to your inbox every Tuesday.