Inflation falls at steepest rate for 16 years

Inflation is now dropping at its fastest rate for 16 years thanks to falling fuel prices, official figures showed today.

The Consumer Prices Index (CPI) – the Government's official benchmark of the cost of living – slowed to 4.5% in October from 5.2% the previous month.

The 0.7% decline – much bigger than economists expected – is the biggest monthly drop since April 1992, the Office for National Statistics (ONS) said.

As crude oil prices plummet from their record highs of mid-July, the average price of a litre of petrol fell 7.1p to 104.5p in the month to October, with diesel dropping 7p to an average 116.3p.

Although CPI is still more than double the Bank of England's 2% target, the bigger-than-expected monthly fall brings home warnings of the threat of deflation – negative inflation – next year from Bank Governor Mervyn King and Prime Minister Gordon Brown.

Soaring food, energy and petrol costs have pushed the CPI to record highs this year but today's lower figure also reflected falling meat prices in October as supermarkets cut prices, compared with 12 months earlier when costs were on the way up.

Meanwhile, the lower crude prices saw transport costs ease at their quickest rate for almost 20 years as the cost of sea and air transport as well as air fares fell.

The wider measure of inflation, the Retail Prices Index, fell to 4.2% in October from 5% the previous month – the biggest slowdown in the annual rate since January 1993.

Falling fuel costs also contributed to the decline but the RPI also includes house prices hit by the ailing property market.

Mr King warned in the Bank's latest inflation predictions last week that this rate was "very likely" to turn negative next year.

The Bank has warned of a danger of undershooting the CPI's 2% target next year as prices fall in a looming recession – signalling the prospect of further rate cuts to come from the current 53-year low of 3%.

TUC general secretary Brendan Barber said: "It is good news that inflation is coming down. The Bank of England should take this opportunity to cut interest rates further.

"But this drop in prices is also a sign of how rapidly the economy is shrinking. The Government must investigate urgently every method to get the banks lending again. Otherwise, lower interest rates will do nothing to save jobs and businesses."

David Kern, chief economist at the British Chambers of Commerce, said: "We predict further sharp falls in CPI inflation towards 1% in the final months of 2009.

"The possibility of deflation at that time is now a distinct risk.

"Deflation would have appalling consequences for British business and for the economy as a whole so it is imperative that the Government and MPC take forceful action.

"Following these figures, it is clear that UK interest rates will be cut further, most likely to 2%, in early 2009. One cannot rule out rate cuts below 2% later next year."