The UK inflation rate as measured by the Consumer Price Index dropped from 5.2% in September to 4.5% in October and is set to go on falling sharply over the next six months.
The Retail Prices Index inflation rate fell from 5% to 4.2%. As expected, the major contributor was tumbling petrol prices, but some foods also dropped in price after rising earlier in the year.
Lower fuel and food prices will continue to push inflation rate down well into 2009, and the RPI will probably fall faster than the CPI thanks to its inclusion of housing costs. Inflation in the eurozone is still below the UK rate at just under 4%, but by the middle of next year both UK and eurozone inflation will probably be down to 2.5% or less.
A unique situation
The last time we had inflation over 5% was in 1988-92 when the rate stayed at over 5% for four years – and borrowers paid over 10% interest on their mortgages. In contrast, 2007-08’s inflation will go down as just a blip caused mainly by a short-lived spike in oil and food prices.
That doesn’t means inflation is gone for good. The current anti-recession policies of low interest rates and more government spending are potentially inflationary, and so is the low value of sterling - down from $2 to $1.60 in just six months. But with consumer demand so weak, there’s no lid on the pressure cooker and no likelihood of rising prices.
In fact, economic forecasts are for interest rates to be as low as 2% next year, which should mean steady declines in mortgage lending rates. So while the recession will lead to higher unemployment, those in work will be much better off than they were in the recessions of the 1990s or 1980s, when both inflation and interest rates were at much higher levels.
