According to figures released yesterday, inflation is at its lowest level for 14 months. The consumer Prices Index (CPI), which is the Treasury’s preferred measure of inflation, showed that the rate had fallen to 3.6%, a drop of 0.6% from December.
Though the figures are helped by the fact that last January’s VAT increase from 17.5% to 20% is no longer included in the annual calculations, it’s still being heralded as good news.
The chief economist at Barclays Capital, Simon Hayes, said: “The sharp drop in inflation that is under way should be welcomed as a sign that the worst of the squeeze is probably behind us.
Falling inflation is a small mercy for which UK households can be thankful.”
Despite the drop, the Bank of England’s Governor, Sir Mervyn King, was still required to write a letter to the Treasury. Under rules created when the bank became independent in 1997, the governor must write to the chancellor each time inflation stays one percentage point above or below the government’s 2% target for over three months.
He wrote that the CPI would ‘continue to fall back to around the target by the end of 2012.’ However, he acknowledged the euro-zone crisis as being the biggest problem for economic growth and warned that although inflation is now falling as expected, economic growth remains weak and unemployment levels are still high. He also suggested that the process of rebalancing still has a long way to go. Joblessness currently stands at 2.6 million and is expected
to peak at 2.9 million in 2013.
The CBI’s director general John Cridland gave a cautiously optimistic forecast across this year and into next year. He said that overall growth was likely, although risk factors still exist. Mr Cridland said the outlook would be more optimistic for 2013.
Some commentators warn, however, that with continued increase in household bills for food and energy and wages failing to keep pace with inflation, there are still tough times ahead for most of us. The Office of National Statistics’ most recent figures say wages are only rising at 1.9%, a rate not even as high as the Bank of England’s 2% target.
Despite this latest fall in inflation it’s still hard for those living off savings or on fixed incomes, and especially higher rate taxpayers. Basic rate payers need to be earning at least 4.5% on their savings to beat inflation. Those who fall in the higher rate category need to to make 6% on taxed savings to keep their money inflation-proof.
This hits the over-65′s particularly hard who also suffer more than the young with increased food and fuel prices. Saga claims the average over-65 year old has 20% less spendinng power than they did before the start of the banking crisis in 2007.