MercoPress. South Atlantic News Agency

UK annual inflation falls to 3% in Jan; deflation fears

A smaller-than-expected drop in inflation has failed to ease fears that the UK could soon be in the grip of deflation. The UK Office for National Statistics (ONS) data revealed a fall in the Consumer Prices Index (CPI) to 3% in January from 3.1% in December, which was far lower than experts had predicted.

But the Retail Prices Index (RPI) measure of inflation - used in most wage settlement negotiations in the UK - plunged to its lowest level in nearly 49 years last month, at 0.1% in January from 0.9% in December. And there are fears that both RPI and CPI could slump into negative territory over the year ahead, sparking fears for the economy. Economists were surprised that the fall in official CPI inflation was not greater, having pencilled in a drop to around 2.7%. The ONS figures suggested the Government's move to reduce VAT from 17.5% to 15% in December brought forward discounting on the high street, impacting the January inflation data. Alcohol prices also rose across beer, wines and spirits, while consumers were likewise faced with higher costs for recreation and culture - such as toys and games and package holidays. However, CPI has still fallen significantly from the 5.2% peak last September as the recession tightens its grip and experts said deflation fears have not eased after the surprising data. Fuel prices continue to fall from last year's peak, plunging at the fastest pace on record in January, while recently announced gas and electricity bill reductions are also set to pull inflation lower. Jonathan Loynes at Capital Economics said: "January's UK CPI figures revealed a smaller drop in inflation than expected, but don't preclude a further fall to zero and beyond over the coming months. The pressure on key high street goods prices is still strongly downwards and with these pressures set to intensify as consumer spending weakens further, and food and energy price inflation set to fall considerably further, we still expect CPI inflation to turn negative in the late summer/autumn." The further fall in RPI will be seen as key given the current round of private sector wage negotiations. Investec economist David Page said wage growth is going to slow "quite markedly" this year, impacted also by high levels of unemployment. But he said wages were not expected to fall year-on-year even if RPI turns negative.