Economy: CPI inflation falls to 14-month low of 3.6%

HARD-pressed households felt some relief last month as official figures revealed the rate of inflation fell to its lowest level in more than a year.

The Consumer Prices Index (CPI) rate of inflation fell to a 14-month low of 3.6% in January, from 4.2% in December, as the previous year’s increase in VAT from 17.5% to 20% fell out of the year-on-year comparison.

There was some upward pressure from clothing prices in the month as January’s sales were less deep than in 2011, after retailers brought forward their turn-of-the-year clearances to draw in customers ahead of Christmas.

As the CPI rate is has remained more than a percentage point away from the Government’s 2% target for a further quarter, today’s figure will trigger another letter of explanation from Bank of England governor Sir Mervyn King to Chancellor George Osborne.

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 data further vindicates the bank’s decision last week to pump an extra �50billion into the economy through its quantitative easing programme.

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The VAT effect had a pronounced impact on transport costs which applied the greatest downward pressure to overall prices in January, as they fell 0.7%.

The fall was also driven by softer rises in the cost of crude oil, which led to lower price increases in petrol and diesel, new car sales and maintenance.

The average price of petrol at the pumps in January rose by 0.6p per litre, compared with a 5.4p rise last year, to �1.33 per litre. Diesel was up 0.7p, compared with a 5.8p rise, at �1.41 per litre.

The VAT increase also had a significant impact on the prices charged by restaurants and hotels, with costs little changed this year. Food prices were also broadly flat on the month and had a slight downward impact on the overall rate of inflation.

However, a softer drop in clothing and footwear prices provided some resistance to the fall in the overall rate of inflation.

Clothing costs fell by 4.9% in January, compared with a 5.9% drop in 2011, as discounting and promotion was introduced earlier to tempt hard-pressed consumers in the run-up to Christmas.

Other measures of inflation also fell with the retail prices index (RPI) dropping to 3.9% in January from 4.8% in December, its lowest level in just under two years.

A Treasury spokesman said: “Inflation fell significantly in January for the second month in a row, which is good news for family budgets. The Bank of England and other forecasters expect inflation to keep falling through this year, providing additional relief.”