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Inflation eases as food prices fall

Office for National Statistics said the main downward pressures in October came from falls in the cost of food due to widespread discounting by supermarkets

UK inflation has fallen back from multi-year highs thanks to supermarket food price wars, easing the way for the Bank of England to pump more money into Britain's faltering economy.

Official data showed inflation in October was 5%, down from 5.2% in September and below forecasts for 5.1% in a Reuters poll of economists.

The rate, as measured by the Consumer Prices Index (CPI), is still more than double the BoE's government-set target of 2% but policymakers have been defending their decision to inject cash into the economy — a move that can stoke price pressures — with the assertion that inflation would soon start on a downward path.

Economists said the latest CPI data lent support to the Bank's stance.

"The easing in the rate of inflation marks the start of what is likely to be a downward tend, with a further marked easing in the rate likely in coming months as petrol price rises and January's VAT hike fall out of the year-on-year comparisons. The rate could well fall back to target in the next 12 months," said Chris Williamson, chief economist at Markit.

Publishing the latest inflation numbers, the Office for National Statistics said the main downward pressures in October came from falls in the cost of food due to widespread discounting by supermarkets and good harvests for certain produce. Food prices fell by 0.9% between September and October, the biggest drop for those two months since 1996, as vegetables and fruit fell fastest.

Changes in air fares and petrol prices also helped.

But there was upward pressure on inflation from clothing prices and as in previous months from electricity and gas bills.

The Retail Price Index measure of inflation (RPI), which is used in many pay deals, was also softer than expected at 5.4%, down from 5.6% in September.

The squeeze on households from rising bills accompanied by government austerity measures, economic worries and job uncertainty has hit consumer spending hard, businesses say.

A Treasury spokesman said the slight fall in inflation last month still left people under pressure.

"The government recognises that these are difficult times for households as prices continue to be affected by conditions in the global oil and gas markets. The Bank of England has forecast that inflation should fall rapidly over 2012, but in the meantime the government is taking action to help consumers with current high costs, including cutting fuel duty and freezing council tax," he said, Although inflation is widely expected to fall further, many economists doubt that will be enough to drag UK growth out of the doldrums.

"Lower inflation should provide a boost to the fragile-looking economic recovery, as household spending has been hit in recent months by the squeeze to real incomes that has resulted from the combination of high prices and sluggish pay growth. However, it is difficult to believe that this will provide a sufficient stimulus to offset weak demand in export markets and demand-dampening austerity measures at home," added Markit's Williamson.

The BoE publishes its latest forecasts for inflation and growth on Wednesday. Its quarterly inflation report will be scoured for clues as to if and when it will do more assets purchases — a process of pumping money into the economy known as quantitative easing.

Governor Mervyn King is expected to reaffirm the Bank's central view inflation will fall back markedly.

Alan Clarke, economist at Scotia Capital warned the Bank may get ahead of itself on inflation. "Going forward, we are likely to see a considerable slowdown in headline inflation. While we expect inflation to get close to the 2% year-on-year, we doubt that it will crash through it – contrary to what the BoE will probably tell us tomorrow in its updated projections," he said.


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