Inflation figures may limit benefits
Updated on 13 October 2009
Inflation has fallen to an annual rate of 1.1 per cent, the lowest level for five years, according to official figures.
The main reason for the fall is gas and electricity bills.
In September last year, energy prices went up sharply but in September this year they are unchanged.
As a result, that has helped to pull down the rate of inflation.
Bananas also played their part. Fruit prices helped to bring down the level of inflation, as did meat prices.
The big picture is that inflation has fallen dramatically over the last year.
In September 2008, the annual rate of inflation was 5.2 per cent compared to today's level of 1.1 per cent.
That reflected a big rise in oil prices that pushed up petrol, gas, and electricity.
As the world plunged into recession at the end of last year, oil prices fell sharply, taking many other prices down with them.
But many economists believe that this is the low point for inflation and the rate will now start to turn up.
That is partly for technical reasons. The big rises in petrol, gas and electricity that we saw last year have now fallen out of the inflation measure, so they won't have any influence on the overall rate from now on.
The government's decision to cut VAT last January is another big influence.
Official statisticians reckon that the VAT cut on its own may have taken 1.5 percentage points off the inflation rate.
So when VAT goes back up in January 2010, it is assumed that the inflation rate will go back up by roughly that amount as well.
This matters to anyone with savings or a mortgage because its this rate of inflation that determines what the Bank of England does with interest rates.
The Bank aims to keep inflation at 2 per cent so an annual rate of 1.1 per cent suggests the Bank has little to worry about on the inflation front and will be keeping rates low for some time to come.
It also suggests the Bank will also want to continue with its programme of Quantitative Easing, boosting the economy by pumping money directly into the financial system.
If inflation now heads back up, that suggests the Bank will start thinking about raising interest rates or reversing Quantitative Easing.
So economists are now arguing about how important any future upturn in inflation really is.
Some point to the fact that petrol prices are now on the way back up as oil prices have risen again.
Others argue that the Bank will not be influenced by a rise in inflation if its just been caused by technical factors, like the change in VAT.
They argue that with the economy still in recession, with unemployment on the rise, with banks still unwilling to lend, and with the prospect of higher taxes and public spending cuts on the horizon, the likelihood is that broader inflationary pressures will continue to ebb away.
