UK inflation drops to 4.2%

UK CPI inflation fell from 4.8% in November 2011 to 4.2% last month, the equal largest drop since December 2008, according to the Office for National Statistics.

Economists had predicted the drop to 4.2% in part because of discounting by retailers ahead of the Christmas period. The fall, which was in line with forecasts, was driven by falling petrol, gas and clothing costs, the ONS said.

RPI inflation also fell from 5.2% in November to 4.8% in December, slightly above the 4.7% that had been forecast but still the largest fall in annual RPI inflation since June 2009.

The ONS said RPI figures were also driven down by falling petrol, oil & gas and clothing prices, but said rising car insurance fees and phone charges had partially offset such falls.

The last time month-on-month CPI inflation fell by a larger amount was in December 2008, according to the ONS, though CPI did also fall by 0.6 percentage points between May and June 2009.

A third consecutive month of falls lends credence to the Bank of England's last inflation report, published in 2011, which said inflation would likely fall back sharply in 2012 as a result of declining contributions from VAT, energy and import prices.

"Further chunky falls in inflation lie ahead in the coming months, helped by the recent announcement of gas and electricity price cuts," said Capital Economics chief UK economist Vicky Redwood.

"In fact, inflation still looks set to fall below its target further ahead - and today's figures support our view that we will see more QE from the Bank of England next month in an attempt to prevent this."

The pound rose against the dollar after the report to trade at $1.5370, a rise of 0.3%.