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Inflation drops to 4.5%

Inflation dropped to 4.5 per cent in October, down from 5.2 per cent in September, a larger than expected drop.

According to the Office of National Statistics, the Consumer Prices Index annual inflation – fell by 0.7 per cent, but still remains higher than the Government’s target 2 per cent. But experts say this is only the start of inflation drops, and fear that deflation could become a reality in 2009.

The ONS says the largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year. The decrease this year was triggered by a sharp fall in the price of crude oil.

There was another large downward contribution from food and non-alcoholic beverages. The effect came largely from the price of meat, which fell this year compared with a rise last year.

British Chambers of Commerce chief economist David Kern says: “UK annual CPI inflation has fallen for the first time since August 2007. But, the declines in inflation were much sharper than the markets expected.

“We predict further sharp falls in CPI inflation towards 1 per cent 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 per cent in early 2009. One cannot rule out rate cuts below 2 per cent later next year.”

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