Falling petrol prices in December caused the steepest drop in the U.K.'s annual rate of inflation in more than two years, giving the Bank of England more breathing room to bolster its stimulus program.The consumer price index rose 4.2% in December from the same month a year earlier, the Office for National Statistics said Tuesday. The figure, which was in line with economists' forecasts, is down from 4.8% in November--marking the biggest month-to-month fall in the annual inflation rate since April 2009, when the U.K. was suffering the effects of the last recession.
Inflation is still far above the Bank of England's 2.0% target but BOE policymakers expect further steep declines in coming months, because last year's rise in the U.K. sales tax and energy price rises shouldn't be replicated in 2012.
Economists believe that will give the BOE room to maneuver on monetary policy, expanding its quantitative easing program of asset purchases as soon as February in a bid to kick-start the economy.
The current GBP275 ceiling for asset purchases is due to be hit in February. The key BOE rate is at an all-time low of 0.5%.
The falling rate of inflation will also give consumers some respite from a long-running squeeze on their incomes. Average pay rises for workers have trailed far behind inflation, giving them a de facto pay cut. That has caused a significant drag on the U.K. economy, which is highly geared toward consumer spending.
A U.K. Treasury spokesperson predicted further falls in inflation in coming months and welcomed the "relief for family budgets" that would result.
The main factors pulling down the rate of inflation in December were a fall in petrol prices and unchanged gas prices, both of which contrast with rises a year earlier, the ONS said.
Clothing prices fell, a reflection of heavy discounts by retailers attempting to lure shoppers in the run-up to Christmas.
In month-to-month terms, overall consumer prices rose 0.4%.
"Core" consumer price inflation, which strips out volatile items such as energy and food, slowed to 3.0% year-on-year from 3.2% in November. An alternative measure of inflation, the retail price index, slowed to an annual 4.8% rate from 5.2%.
