After seeing marginal falls in inflation for October the Office for National Statistics brings a little bit more good news with another small drop in November.

The government’s preferred measure of inflation, the Consumer Prices Index (CPI), fell from October’s 5% down to 4.8%, with the Retail Prices Index (RPI-which also includes housing costs) falling from 5.4% to 5.2% – see here for details on last month’s report.

The actual CPI is now 121.2 based on May 1st 2005 being 100. And the RPI now stands at 238.5 based on January 1987 being 100.

From the CPI graph you can see that the rise in inflation is still relatively steep.

Data from Timetric. To view this graph, please install Adobe Flash Player. Index from Timetric

And remember that anything above zero means higher prices so if wages are not going up then the value of the money in your purse/wallet is being devalued.

There is also the question of any savings you may have that are attracting interest rates at anything less than the rate of inflation.

The largest downward pressures on inflation were from ‘food, petrol, clothing and furniture, household equipment and maintenance’. With the upward pressures coming from ‘domestic heating and off sales of alcohol’.

This inflation fall will of course be welcomed by both the government and the Bank of England who both say that inflation will be falling consistently in the months ahead and reach the 2% target by the end of 2012.

Andrew Goodwin, the senior economic adviser to the Ernst & Young Item Club said:

This is bang in line with what we had expected. We’re in the early stages of a move back to the 2% target, a move which should gather pace over the next couple of months as some of the temporary factors – notably the VAT rise – begin to fall out of the year-on-year calculation.

Significantly, we are beginning to see the effects of movements in global commodity prices being reflected in the prices charged in shops. Surging global food and oil prices were responsible for a significant chunk of this year’s high inflation rates, but these have now stabilised as the global economy has slowed. As a result, they are exerting less pressure on domestic inflation than they were before. At the same time, we are increasingly seeing retailers being forced to discount, as they try to support sales in the face of very weak consumer demand.

We expect CPI inflation to be back at the 2% target by next autumn, as the temporary factors drop away one-by-one. While we are not convinced that it will fall back as far as the Bank of England forecasts, the prospect of a period of below-target inflation should still provide plenty of room for the MPC to loosen monetary policy further in 2012, if conditions remain as weak as they are now.

This will also provide some welcome respite for hard-pressed families who have struggled with falling real wages for much of the past four years. Currently households’ spending power is falling by around 2.5% a year in real terms but, with inflation set to slow sharply, this should reverse by the end of next year.


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