Inflation has fallen sharply at the start of 2012 as the impact of last year's increase in VAT to 20% falls out of the calculations.
Figures released from the Office for National Statistics show the Consumer Prices Index (CPI) measure of inflation falling to 3.6% in January, down from 4.2% in December. Retail Prices Index (RPI) inflation, which includes mortgage interest payments, fell to 3.9% from 4.8%.
In addition to the reduced impact of VAT, smaller increases in the cost of commodities and oil than seen a year earlier also helped to bring the inflation rate down. The average price of petrol in January rose by 0.6p a litre, compared with a 5.4p rise in 2011 and diesel was up 0.7p a litre, compared with a 5.8p rise last year.
However, the inflation rate remains well above the Bank of England's 2% target and wages are only rising at a rate of 1.9% meaning households and individuals are still losing disposable income.
Sir Mervyn King – Governor of the Bank of England - said inflation was likely to continue to fall - justifying the bank's decision last week to inject an extra £50bn into the economy through quantitative easing [see earlier story].
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