UK Inflation Drops

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Yellow Belt
Inflation drops by most in 12 years, but gas bills hold back further falls

Inflation has dropped sharply from 4.1 per cent to 3.1 per cent, the largest fall in over a decade.

The fall in the Consumer Prices Index, however, was less significant than most economists were hoping for because energy giants have failed to cut customers' gas and electricity bills from record highs.

In July last year the six major energy suppliers increased bills to a record level, taking the average household's dual fuel tariff – gas and electricity – to £1,303. According the Office for National Statistics, gas bills are 50 per cent higher than a year ago and electricity 37.3 per cent higher.

There had been high hopes that the companies would start to cut their bills in the New Year, following plunging prices on the wholesale market, but these have yet to materialise.

Economists had predicted a much bigger fall in CPI to 2.6 per cent, bringing it closer to the official 2 per cent target. They said that not only had high gas bills held back the fall, but also not all of the 2.5 percentage point cut in VAT to 15 per cent was passed on.

The Office for National Statistics estimated that two-thirds of shops passed on the VAT cut to consumers, with internet retailers passing it on in full in contrast to services providers – such as restaurants and tradesmen – who barely passed the reduction on.

Despite the smaller-than-expected CPI fall, some economists still believe that the UK is facing a period of deflation in the second half of this year.
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