Shops price war dampens inflation

An aggressive supermarket price war helped push down inflation last month amid signs that the rise in the cost of living appears to have passed its peak.

The Consumer Price Index (CPI) rate of inflation fell to 5% in October, the Office for National Statistics (ONS) said, slightly down on the three-year high of 5.2% in September.

"Significant and widespread discounting" by supermarkets, as well as a strong harvest for some produce, saw the biggest fall in food prices for a September to October period since 1996, the ONS said.

But another utility tariff hike from big six supplier npower continued to pile pressure on consumers, who are struggling to cope with average wage growth far below the rate of inflation.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "These figures support our view that inflation is probably past its peak, and a sharp decline can be expected during the course of 2012."

Despite the slight drop, Bank of England Governor Sir Mervyn King was required to pen a letter of explanation to the Chancellor as inflation still remains more than double the Government's 2% target.

Sir Mervyn, who issued the letter as he was formally knighted at Buckingham Palace, said that without temporary factors such as the impact of the VAT increase, inflation would be below 2% and forecast that the rate will "fall back sharply in the next six months or so".

Tesco triggered a price war with its rivals in October with its £500 million Big Price Drop campaign, which saw the cost of 3,000 everyday products cut.

Competitors soon responded with their own schemes, including Sainsbury's Brand Match campaign, while Asda slashed prices at the petrol pumps.

The moves saw vegetable prices fall 2.4%, fruit ease 1.6%, milk, cheese and eggs drop 1.2% and meat edge down 0.7%, the ONS said.

Meanwhile, there were signs of further relief as Debenhams launched its annual five-day pre-Christmas promotion with £200 million savings with price cuts of up to 40% in stores and online.

British Retail Consortium director general Stephen Robertson said it was a sign retailers were responding to households' severely strained budgets.

He said: "With consumers' budgets under severe pressure, competition between retailers has intensified. Supermarkets are cutting their already thin margins even further to hold down shop prices in the face of rising energy and property costs."

Sir Mervyn and fellow members of the Bank's Monetary Policy Committee (MPC) will not be surprised by today's figures as they previously forecast inflation to surpass 5% before it comes down rapidly over the next year.

The Bank is expected to slash its forecasts for growth and inflation in its quarterly inflation report tomorrow, as a raft of key indicators all point towards the economy heading into reverse.

The weaker growth outlook is likely to push down the inflation projection - but this will be slightly offset by the impact of the £75 billion round of quantitative easing unleashed in October.

Sir Mervyn said the Bank is now faced with the possibility of inflation undershooting the 2% target due to "substantial risks around the global economic recovery and the implications of a further slowdown in the world economy for the UK".

Elsewhere, a 6% fall in air fares and a slight 0.4% dip in petrol pump prices brought the overall CPI rate down. The average price of petrol was £1.34 in October, the lowest since July.

Gas and electricity bills continued to apply the most significant upward pressure on the overall rate of inflation in October, rising 1.4% and 1.5% respectively.

The surge came as npower introduced a price hike, following previous rises from British Gas, SSE, Scottish Power and E.ON. EDF, which increases bills this month, will impact November's inflation figures, the ONS said.

TUC general secretary Brendan Barber said high prices meant families were facing a tough Christmas.

He said: "The small ease in inflation will provide some comfort for families but until wages keep up with prices, people's real incomes will continue to deteriorate."

However, most economists said the figures were likely to represent the start of a marked downward trend in the rate of inflation.

Vicky Redwood, chief UK economist at Capital Economics, said: "Fingers crossed, October's drop in inflation should mean that we have now passed the peak ininflation. The start of 2012 should see inflation begin to fall back sharply and we think that it will be below the 2% target within a year."

PA