Money News

The pound fell to a  six-month low against the euro today after inflation fell by more than expected to 1.1 per cent in September due to shrinking energy prices.

 

Sterling declined by 0.5 per cent, making one euro worth 93.8p, the weakest level since March, while the pound lost ground against the dollar at $1.5722

 

The consumer price index (CPI) measure of inflation fell from 1.6 per sent in the 12 months to August and the 1.1 per cent reading for September is below the 1.3 per cent expected by economists.

Inflation is now at its lowest rate since September 2004.

 

Today's figures reinforce yesterday's prediction by the Centre for Economics and Business Research that interest rates will stay at their record low, of 0.5 per cent, until at least 2011.

 

Inflation fell on a steep 7.3 per cent decline in utility bills while food and non-alcoholic beverage prices shrank by 0.9 per cent in the year to September.

 

Core inflation, which strips out the effect of tobacco, alcohol, food and energy, shrank from 1.8 per cent in August to 1.7 per cent in September

 

The fall will lead to renewed fears that Mervyn King, Governor of the Bank of England, will have to write a letter to Alistair Darling, the Chancellor to explain the low rate of inflation.

 

The Governor is required to write to the Chancellor if the CPI rate of inflation is 1 per cent above or below the Bank's 2 per cent target.

 

The Bank of England is keen to avoid a downward inflationary spiral, in which declining prices reduce companies profits, and, in turn, fuel the recession, reduce wages, increase unemployment and reduce the confidence of investors in UK plc.

 

The wider retail price index (RPI) measure of inflation, which includes mortgage payments, fell further into negative territory in September, from -1.3 per cent in August to -1.4 per cent, leaving millions of families, disabled people and their carers in danger of having their benefits frozen, unless the Chancellor intervenes.

Under current rules, the RPI measure for September is used to calculate the rise in benefits that are paid out from next April.

Ministers are hoping Mr Darling will step in to raise the most sensitive benefit payments, amid concerns a freeze would come into force before a general election next year.

 

However, a 1 per cent rise on the £170 million benefit bill could cost an extra £1.7 billion at a time when the Government is struggling to reduce public spending.

 

While there are fears that inflation could fall further, it's believed that last month's 1.1 per cent inflation is likely to mark the lowest point in consumer price inflation.