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Inflation fall expected as retailers slash prices

• December inflation expected at 4.2%
• Figure is down from 4.8% in November
• Fall follows supermarket price war and big high street sales
• Interest rates likely to stay low
• Fall makes further quantitative easing more likely

An aggressive supermarket price war and a range of high street promotions are expected to trigger a sharp fall in December’s inflation figure on Tuesday.

The Office for National Statistics (ONS) is expected to reveal that the consumer prices index (CPI) rate of inflation fell to 4.2% last month, from 4.8% in November, according to consensus City forecasts.

The drop, down from September’s three-year peak of 5.2%, came as a vicious supermarket price war unfolded and an unprecedented number of pre-Christmas promotions were put on by retailers desperate to drum up trade.

A further drop in the rate of inflation is likely to reinforce arguments in favour of holding interest rates at historic lows of 0.5%, after thinktank CEBR predicted they will be held until 2016, as well as another boost to the quantitative easing programme.

Victoria Cadman, an economist at Investec, who has forecast CPI to come in at 4.3%, said: “Evidence for December to date suggests that it has been another month of heavy discounting on the high street, helping to keep a hold on clothing and other goods price inflation.”

Earlier this month, the British Retail Consortium (BRC) said shop price inflation fell to 1.7% in December down from 2% in November – its lowest level for 16 months.

The rate of inflation for non-food items was at a two-year low of 0.3%, and significantly down on 0.8% in the previous month. This was driven by price cuts on electrical items, clothes and footwear, with many items cheaper than they were a year ago.

However, the BRC said food prices rose 4.2%, which was slightly higher than November’s 4% increase, despite the high level of supermarket discounts.

The big players have been embroiled in a price war after Tesco announced a £500m price-cutting campaign, Asda guaranteed to be 10% cheaper than its rivals and Sainsbury’s launched its own brand price matching scheme.

However, Tesco shocked investors last week when it revealed the Big Price Drop had failed to bring in enough customers.

Prices have still been rising when compared to a year ago because falling commodity prices take time to work through to tinned and packaged foods. The fall in CPI will also be driven by lower petrol prices.

However, there is a risk that the figure may come in higher than expected as a result of air fares which are likely to have risen over the holiday period.

The Bank of England expects inflation to fall back to its 2% target over the coming months.

Cadman said another fall in inflation would pave the way for the Bank’s monetary policy committee to inject a further £50bn in to the economy, bringing the total QE stock to £325bn, at its February meeting.

The downward trend is set to continue in January, which will be the first month that the figures will not be pushed up by last year’s hike in VAT to 20%.

Falls in utility bill announced this week will also help bring inflation down in the coming months. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds