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Predictions of further sharp falls ahead for inflation

Capital Economics predicts inflation will fall below the Bank of England’s target of 2 per cent this year after the consumer price index fell in February.

This week, the Office for National Statistics said inflation fell from 3.6 per cent in January to 3.4 per cent last month following downward pressure from domestic energy, recreation and culture and transport. Inflation has fallen markedly since its high of 5.2 per cent in September 2011 but still remains well above the BoE’s 2 per cent target.

CE chief UK economist Vicky Redwood says: “Inflation is still likely to fall sharply in the second half of the year as last year’s rises in utility prices stop boosting the annual comparison and lower cotton prices pull down clothing inflation. The fundamental drivers of inflation remain very weak. Most notably, pay growth dropped to just 1 per cent in January. We think inflation will be below 2 per cent by the end of the year and fall to just 1 per cent or so in 2013.”

Churchouse Financial Planning director Keith Churchouse says: “Inflation could fall to below 2 per cent at the end of the year because there has been a general slowing of the economy and consumer spending.”

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