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Inflation rate falls back but remains above target

CPI for October was 5.0%, RPI was 5.4%

The largest downward pressure came from falls in the price of food

The UK inflation rate fell in October, after sharp rises in the last three months, but the Consumer Prices Index (CPI) is still far above the Bank of England’s target of 2%.

CPI, the government’s preferred measure of inflation, dropped to 5.0% in October, while the Retail Price Index (RPI) fell to 5.4%.

Food prices bring down headline CPI

The Office for National Statistics reported that food prices fell month on month by 0.9%. This was caused by widespread supermarket discounting and good harvests for products such as grapes, apples, pears, potatoes and broccoli. The largest downward falls were in the price of fruit (1.6%), milk, cheese and eggs (1.2%), vegetables (2.4%), meat (0.7%) and bread and cereals (0.4%).

Air fares also fall

Air fares fell by 6% between September and October this year, compared with a rise of 2.7% between the same two months in 2010. European and long haul routes saw the biggest falls.

Rates stay above target  

Although inflation remains above the Bank of England’s target of 2%, the Governor of the Bank, Mervyn King, had predicted a fall in inflation rates. In October, he attributed recent rises to increased energy prices, import prices and increased VAT. Writing to the Chancellor, George Osborne, yesterday, he confirmed his long-term view: ‘As the impetus from external price pressures dissipates, and the increase in VAT drops out of the annual comparison early next year, the Committee’s best collective judgement is that inflation will fall back sharply in the next six months or so, and continue falling thereafter to around target by the end of next year.’

Impact of inflation

While the reduction in CPI will be welcome news to many, the overall movement of prices remains upward, with the cost of living continuing to rise. Which? personal finance expert, Ian Robinson, said: ‘The fall in food prices will help some of those most exposed to the impact of inflation. A further boost should come from the fact that September’s inflation rate is used to set state pension rates for 2012-13. If Mervyn King is correct, and inflation continues to fall, pensioners could be better off than they might otherwise have expected.

‘The good news is tempered by continuing low interest rates however. Savers still struggle to beat inflation and the need to shop around for top savings rates remains high. Those who accept poor rates will see the value of their money significantly eroded year on year.’

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