Prices show inflation likely to fall

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FACTORY gate prices increased at a slower-than-expected rate in December, stoking expectations of more quantitative easing in February to revive Britain’s flagging economy.

The Office for National Statistics said producer output price inflation slowed to 4.8 per cent in the year to December from 5.4 per cent in the year to November. That was bigger than the fall to five per cent forecast by economists and the lowest rate since December 2010.

The figures tally with other recent economic surveys and support the Bank of England’s forecast that inflation will tumble early this year and dip below its two per cent target towards the end of 2012.

Recent figures from the British Retail Consortium showed shop prices grew at their slowest rate in November for 16 months, gaining just 1.7 per cent. Within this, non-food prices grew at just 0.3 per cent and the BRC warned they are likely to turn deflationary soon.

“The benign set of producer price data will be well received by the Bank of England,” said IHS Global Insight economist Howard Archer. “The data supports belief that consumer price inflation is headed down sharply over the coming months, and fuels already strong belief that the Bank of England will enact at least £50bn more quantitative easing in February.”

The BoE held off extending its asset purchase scheme beyond £275bn at its meeting on Wednesday and Thursday.

The drop in producer price inflation was driven by the first month-on-month fall in prices since June 2010, and is likely to be sustained as input price inflation tumbled to an annual rate of 8.7 per cent from 13.6 per cent the month before.