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UK Economy: Inflation Falls After Supermarket Price Wars

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Slight falls in the petrol price and supermarkets' discounts saw inflation pushed below 5% in November
Slight falls in the petrol price and supermarkets' discounts saw inflation pushed below 5% in November

Inflation in the UK has fallen to 4.8% in November, the Office of National Statistics (ONS) has reported.

High fuel prices drove consumer price inflation (CPI) to a three-year high of 5.2% in September. Heavy discounting at supermarkets, as well as a slight moderation in the price of petrol, pulled the figure down in October and November. Slight easing in wholesale food prices has also helped to reduce the rate, although rising utility bills kept up their upward pressure.

Inflation remains well above the Bank of England's (BoE) target rate of 2%, but as the economic slowdown bites deeper, and fuel price slip, there is a widespread expectation that the rate will fall rapidly over the next 12 months.

"In contrast to most other indicators for the UK economy, at least consumer price inflation developments are becoming more favourable," Howard Archer, chief UK and European economist at IHS Global Insight said.

"Moderating inflation is desperately needed to ease the squeeze on consumer’s purchasing power and provide some much-needed help to the struggling economy.

However Labour is claiming that Britain now has the highest rate of inflation in Europe. Owen Smith MP, Labour's Shadow Treasury Minister, said: "A temporary cut in VAT, part of Labour’s five point plan for jobs, would ease the squeeze on families, boost our struggling high streets and help to kick-start our flatlining economy. It would cut petrol prices by 3p a litre and give a couple with children an average boost of £450 a year."

TUC leader Brendan Barber welcomed the fall in the cost of living, but warned wage freezes meant it wouldn't make much difference to people's lives. "“It will take many more months of falling inflation, and far higher wage increases, before this long and painful period of real terms pay cuts comes to an end," he said.

Evidence that the inflation rate is decreasing would give the BoE more space to move ahead with more "quantitative easing" - money printing to stimulate economic growth - which, while it frees up capital for lending to businesses and individuals, also has an inflationary effect.

"With consumer price inflation finally heading downwards and looking set to fall particularly sharply during the first half of 2012, it will become less awkward credibility wise for the Bank of England to undertake further stimulative action to boost the struggling economy," Archer said.

"Of course, the Bank of England has been arguing for some time that consumer price inflation will fall back sharply once temporary upward pressures wane, but it will nevertheless be pleased to see the process apparently finally get underway."

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