Page last updated at 12:53 GMT, Tuesday, 16 December 2008

UK inflation rate falls to 4.1%

Economists expect the rate of inflation to continue to fall

Lower energy costs helped to push the Consumer Prices Index inflation rate down to 4.1% in November from 4.5% the month before, figures have shown.

Most analysts expect the inflation rate to continue to fall for several months.

In a letter to the chancellor, the Bank of England governor said inflation could fall "materially" below the 2% target rate in the second half of 2009.

The headline rate of Retail Prices Index inflation also dropped sharply in November to 3% from 4.2% in October.

Inflation graphic

Deflation risk?

Inflation is falling because of lower oil and energy costs. Most economists expect inflation to fall still further into the New Year, with some concerned that not only will it go below the government's 2% target, but that deflation could be possible.

This is bad for the economy as it encourages consumers to delay purchases in the expectation that prices will soon be lower, worsening any economic downturn.

The recession and deflation threats seem as vivid as ever

Hugh Pym, BBC economics editor

However, as the CPI rate of inflation still remains more than one percentage point above the government's target of 2%, Bank of England governor Mervyn King has had to write another letter of explanation to the chancellor.

In his letter to Chancellor Alistair Darling, Mr King said very low inflation was a possibility.

"Given the short term outlook for inflation, it is quite possible that I will next need to write to you to explain why inflation has deviated by more than one percentage point below the target during 2009," he said.

Last week, Chancellor Alistair Darling told the Treasury Committee that he did not see deflation as being a significant risk.

'Recession worsening'

Despite the continuing fall in inflation, many commentators expect the Bank of England's Monetary Policy Committee to cut interest rates still further from the current level of 2% - a 57-year low.

Mr King's letter to the Chancellor
There is relatively little that the MPC can do to prevent inflation moving from above target now to below target during the course of 2009
Mervyn King

"These figures should not deter the MPC from persevering with interest rate cuts," said David Kern, chief economist at the British Chambers of Commerce.

"With the recession worsening, we urge the MPC to cut rates by a full one percentage point in January."

The decline in inflation came as the average price of a litre of petrol fell by 9.3 pence between October and November.

However, food inflation accelerated, with the price of fresh fruit and vegetables being more expensive than a year ago.

Turning his attention to the wider banking sector, Mr King suggested that the Bank may have to implement further measures to help lending rates return to normal.

"Additional measures, building on the government's package to support the banking system announced in October, will probably be required to underpin lending to households and companies," he said.

So far the Bank has given the commercial lenders billions of pounds in loans. This has come on top of the government's own 50bn rescue package for the sector, announced in October.

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