Help For Households: Inflation Falling

The headline rate of inflation has dropped to its lowest level since November (Stuttgart: A0Z24E - news) 2010, in a sign that the pressure on cash-strapped households has continued to ease.The consumer prices index (CPI (Berlin: CEJ.BE - news) ) rate fell to 3.6% on an annual basis in January, from 4.2% in December. The performance mainly reflects last year's increase in VAT being stripped out of the calculations. The figure also remains in line with the Bank of England's forecast that inflation will average just over 3.4% in the first three months of 2012. But while the cost of living is falling, Bank of England governor Sir Mervyn King will still be forced to pen a letter of explanation to the Chancellor as the rate is more than a percentage point away from the Government's 2% target. He is due to outline the bank's latest inflation report on Wednesday which is expected to stick to its previous forecast that the headline rate will fall below the 2% target by the end of the year. That is despite the cost of oil remaining a concern because of tension in the Middle East - particularly over Iran. Brent crude prices have risen to almost $120 a barrel this month - with petrol prices rising back towards record highs after falling slightly in January. Financial services, air travel, clothing and footwear costs helped fuel inflation last month. But the latest figures help ease concerns that the bank's quantitative easing programme - or asset purchases - is not stoking inflation to the extent some had feared. The Monetary Policy Committee announced plans last week to pump an additional £75bn in to the economy, on top of the £275bn already announced, to boost money supply. This comes as credit ratings agency Moody's issued official notice to Britain and the Bank of England that their credit ratings are on watch for a potential downgrade. Giving his reaction to the inflation figures, Sky's economics editor Ed Conway said: "The effect of higher VAT...is no longer pushing up inflation so this was always going to be quite a bit of a fall. "At 3.6% this is more or less in line with what economists had predicted. The only surprise is that the Retail Prices Index (RPI)...is lower at 3.9% than had been expected." The figure, which includes housing costs, is often used by employers as a guage for potential salary increases but the wider economic uncertainty and RPI's high rate have meant the measure has been largely sidelined in recent times.