Inflation fell by much less than analysts had expected to 3% in January.
The Government's preferred consumer prices index (CPI) fell from 3.1% to 3%, while the retail prices index (RPI) hit 0.1%, down from 0.9% in December.
The RPI is thought to have fallen further as it includes mortgage interest costs, which have fallen for some borrowers as the Bank of England cut rates to 1%. Early predictions claimed CPI inflation would fall to 2.7%.
Higher prices for furniture, alcohol and clothing offset a fall in energy bills and loan costs.
Looking ahead, the Bank of England expects CPI to fall to 0.5% in 2009 and won't return to its 2% target rate until the end of 2010.
The Bank of England is expected to cut its interest rates to as low as 0% this year to prevent inflation going negative, producing deflation.
Deflationary spirals can be highly damaging to economies, as happened to the US during the 1930s and Japan in the 1990s, and policy makers will be keen to stave off the threat to help economic recovery.
Contact: John Bakie, Tel: 020 7484 9805, e-mail: [email protected]IFAonline
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