Both measures of inflation have fallen sharply in January after last year’s rise in VAT fell out of the calculations.
Figures released this morning by the Office for National Statistics (ONS) show that the Consumer Prices Index (CPI) fell from 4.2% in December to 3.6% in January.
The Retail Prices Index (RPI), which includes the cost of mortgage interest, fell by 1.2% to 3.9% in January. Today’s fall brings inflation to a 14 month low.
Despite the slowdown in the rate of inflation, CPI is still well above the Bank of England’s 2% target, although most economists, as well as the Bank, believe inflation will continue to fall for the rest of the year.
A Treasury statement 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.”
VAT was increased in January 2011 from 17.5% to 20%; this rise has now fallen out of the ONS inflation calculations and is one of the major causes of the slowdown in the rate of inflation.
Other factors included a lower rise than this time last year in the cost of petrol and diesel.
The news will be welcomed by savers and other groups who have suffered due to the high levels of inflation we have seen over the past few months.
Savers have been hit hard by a combination of low interest rates and high inflation, meaning that almost all savers were seeing a fall in the real value of their savings.
Interest rates show little sign of rising, therefore the recent falls in inflation will be particularly welcome, making it easier for savers, particularly those who pay tax on their interest, to find a best buy savings account which beats inflation.
People with fixed incomes or who have experienced low rises in their wages will also welcome the fall in the rate of inflation.