Inflation Falls As VAT Cut Kicks In

• News
• Published: 20 Jan 2009 in Money and General

Falling petrol prices and the cut in VAT caused the biggest fall in inflation since the recession of the early 1990s, according to official figures.

Heavy discounting on the high street also helped fuel the fall in the Consumer Prices Index (CPI) - the means by which UK inflation is measured - to 3.1% from 4.1% in December.

The Office for National Statistics (ONS) said the drop marked the first time inflation had fallen in December since records began.

But the decrease in CPI was less than experts were expecting, with many predicting it would fall to as low as 2.6%. It reached its peak last autumn when it hit 5.2% in September.

However, the decrease will still heighten fears over a possible deflationary crisis as the looming recession is expected to prompt further falls over the year ahead.

The ONS said the biggest effect on inflation was down to the VAT cut, which knocked 1% off CPI in December, with the rush to announce early Christmas discounts adding to the fall.

Last month also saw the Retail Prices Index (RPI), which includes mortgage interest payments, plunge to 0.9% in December from 3% the previous month - its fastest rate of decline in more than 28 years.