Price inflation has fallen again in the twelve months to December 2011, with the Consumer Prices Index (CPI) now at 4.2%, down from 4.8% the previous month.
This is the largest monthly fall in the pace of price inflation since December 2008 when VAT was reduced.
The Retail Prices Index (RPI) has also fallen in the twelve months to December, from 5.2% to 4.8%.
Whilst price inflation remains stubbornly high and above the government target of 2% for CPI inflation, there are now strong indications it is falling in line with Bank of England expectations.
The publication of inflation figures next month, for the year to January 2012, will be particularly interesting as they will see the increase in VAT to 20% fall out of the calculation and inflation should once again fall quite sharply.
Recent news of domestic energy price cuts due to wholesale price falls should also feed through into lower price inflation this year.
Looking at the contributions to this inflation fall in December, the ONS says the largest downwards pressures came from petrol, gas and clothing.
Our outlook for price inflation during the rest of the year is for it to continue falling back towards the government target.
This should start to provide some respite for savers, who have been suffering at the hands of low interest rates and high price inflation eroding the real value of their money.
A fall in price inflation should also enable the Bank of England to consider a further round of quantitative easing to help kick-start the UK economy which is probably already in a technical recession this quarter.
Inflation remains a very real long-term planning concern, particularly for those in retirement who need to ensure the value of their pension income keeps pace with the rising cost of living.
What we have seen in recent years is the impact of short-term high price inflation. A return to lower levels of annual price inflation should not cause us to forget about how destructive even low levels of inflation can be when compounded over the longer term.
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