By Maximilian Clarke

The consumer and retail prices indexes of inflation both dropped 0.2% to reach 3.4 and 3.7% respectively, after reductions in wholesale gas prices saw utility prices fall.

Further gains in the price of alcohol prevented both indexes from falling further, as had previously been forecast.

Inflation had remained above 5% for much of 2011 which, coupled with public sector pay freezes and climbing unemployment, significantly eroded consumer confidence leading to muted retail sales throughout the year. This added pressure to the Bank of England to raise interest rates in order to bring prices within their 2% target. But the recent reductions in inflation will reduce pressure, allowing the Ban to focus on more growth friendly incentives.

Though whilst inflation continues to fall, it still poses a significant barrier to growth and remains persistently higher than the optimal 2%. Nick Jones, Chief Economist at World First forex brokers, explains:

Inflation is the major risk to the recovery at the moment. News that the sticky inflation of the last few years has remained will come as a disappointment to the Bank of England.

“Although the trend is downwards, we have to remember that both CPI and RPI are outpacing wage growth (1.4%) dramatically and that people are still, in real terms, getting poorer.

“The price of a barrel of oil in sterling terms has increased by around 10% in the past month and this will continues to hurt consumers’ pockets as long as it remains high.

“The figure has helped the pound however which is 0.25% higher vs. the euro since the announcement…”

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