The Office for National Statistics says both key measures of inflation fell significantly in December, with Consumer Price Inflation dropping from 4.8 to 4.2%, and Retail Price Inflation (a measure which also includes mortgage interest payments) down from 5.2 to 4.8%.
In terms of recent history these are still comparatively high numbers, but the point here is that these falls were driven by drops in the costs of two of the key staples in life – fuel and clothing.
We’ll see another significant fall in inflation when the January numbers come out [in February] because that’s the point at which a rolling, annualised number sees the additional impact of last January’s VAT increase drop out.
Price reductions from energy companies will also feed into the numbers but the background noise suggests these reductions are only temporary.
The fall in inflation isn’t necessarily a good sign at the moment because it is a direct result of weak economic demand around the world forcing down the prices of commodities. So it can go hand-in-hand with high unemployment.
But it could improve economic conditions in the months ahead because it will give business a chance to rebuild their profit margins. They can’t put prices up in the current climate, but if their costs are lower the bottom line should improve anyway.
It could also – finally – ease the squeeze on hard-pressed consumers, whose downbeat mood has weighed heavily on the economy for so long.
It’s doubtful that margin improvement on its own will kick-start the economy but could it provide at least a little bit of ammo for investment and job creation?
Government will be watching the inflation figures like a hawk, clearly hoping that business margins and better-off consumers come to the rescue of growth.
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