Articles > Inflation Falls

The key measure of inflation, the Consumer Price Index (CPI), has fallen to its lowest level since the April of last year, to a figure of three percent as of January this year.

Despite all of the concerns surrounding the effect of the credit crunch on the economy and a number of deflationary pressures, inflation is still running about the target two percent as set by the Government.

The main contributory factor behind this 0.1% fall since December is the continued drop in the value of oil, which has a knock on effect of lowering energy and transport costs, making its effect felt at the petrol pump and also the shops.

Although we are still seeing inflation in the economy, and at a higher than desired rate, most experts believe that this will soon turn around, and that we can expect to see inflation fall sharply over the coming months, although whether we will actually see deflation is far from known at this point.

Deflation itself, whilst not good for the overall economy, may be seen as something not so bad to the average person in the street, as it will make goods and services cheaper, lessening the strain on what are already tight purse strings. It is however very much a double-edged sword, as a shrinking economy inevitably leads to greater number of job-losses and a weakening currency.

Whilst the CPI has not dropped as much as was expected, its sister measure of inflation, the Retail Price Index (RPI) has seen a much larger than predicted drop.

The reason behind the big drop of the RPI, some 0.8 percent, is down to the fact that this index takes into account the cost of mortgages – and with all the successive rate cuts employed by the Bank taking effect on people’s mortgages, this cost has dramatically dropped.

At present, there are many deflationary factors acting upon the market, however there are a few areas where goods are bucking this trend – alcohol for example has seen an upward movement in price, as have certain recreational pursuits.

Overall, the picture for the coming months is that the rate of inflation will continue to fall, driving down the cost of living. How quickly these falls will come about is subject to much speculation, but the general consensus is that we will see sharp falls initially, with inflation going as low as half a percent before the year is out.