Inflation fell sharply in December, down to 3.1%, as retailers slashed prices in a desperate bid to encourage Christmas shoppers.
The Consumer Prices Index (CPI), the Government's preferred measure of inflation, dropped from 4.1% to just 3.1%, but is still above the 2% target set by the Treasury.
A 2.5% cut in VAT, coupled with early Christmas sales and continued falls in petrol prices, are responsible for the rapid fall in inflation.
The broader Retail Prices Index (RPI) fell even more sharply, down to 0.9% from 3%.
RPI also take mortgage costs into account, and rapid interest rate cuts have had a major impact on inflation.
The Bank of England fears Britain might enter a deflationary spiral, much like that seen in Japan during the 1990s. It has cut interest rates to an all-time low of 1.5% to try and revive the economy, and analysts believe rates will hit 0% before the end of 2009.
Contact: John Bakie, Tel: 020 7484 9805, e-mail: [email protected]IFAonline
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