Pre-Christmas discounts and a cut in sales tax pushed British inflation down by its biggest margin in almost 17 years last month, but the fall was less dramatic than analysts had forecast, official data showed today.
The headline rate of consumer price inflation slowed to 3.1 per cent from 4.1 per cent, its lowest level since April 2008 but still above the Bank of England's 2 percent target.
Analysts had forecast a much sharper drop in the annual rate to 2.7 per cent.
The pound pared earlier losses against the dollar as the smaller-than-expected drop in inflation suggested the Bank of England may cut rates less aggressively than they had forecast.
"The CPI numbers are disappointing. They have not fallen back as much as expected," said David Page, an economist at Investec. "Some of that is due to the only partial pass-through of the VAT reduction."
The ONS said around two thirds of shops passed on the government's 2.5 percentage point cut in value-added tax, as did almost all internet retailers, but relatively few firms in the services industry followed suit.
Lower petrol prices and hefty discounts by clothes stores eager to lure in price-conscious shoppers also contributed to the fall in inflation.
The broader retail price inflation measure, which is used as the benchmark for index-linked gilts, social security benefits and wages, saw an even steeper decline.
The annual rate slowed to 0.9 per cent from 3 per cent in November. That was its lowest rate since December 2001 and marked the biggest one-month drop since July 1980.
Reuters