Store wars helping to check inflation

THE largest drop in inflation in almost three years eased the pressure on squeezed household incomes last month as high-street stores slashed prices in the run up to Christmas.

A fall in clothing prices – driven by retailers offering discounts – ensured the overall rate of consumer prices index (CPI) inflation dropped to 4.2 per cent in December, down from 4.8 per cent the previous month.

The Office for National Statistics revealed downward pressure also came from fuel prices, down 0.6 per cent, and the cost of alcoholic drinks, which fell 1.5 per cent.

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Economists said the overall drop, which follows a sustained period of high prices and slow wage growth, could pave the way for the Bank of England to pump billions of pounds of extra cash into the economy and hold interest rates at 0.5 per cent.

However, the rate of inflation remains more than double the Government’s two per cent target, meaning savers are still struggling to earn any returns.

Further inflation respite may lie ahead, economists believe.

The Bank of England said in November it expected the rate of inflation to fall back gradually throughout 2012, before possibly undershooting the two per cent target next year.

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Chris Williamson, of financial information company Markit, said: “Further falls are likely in coming months, reducing the squeeze on incomes and providing a much needed boost to economic growth in 2012.”

Chancellor George Osborne said on Monday the Government is doing everything possible to “weather the storm” as forecasters warned the UK is likely to already be in recession.