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Inflation rate falls below 2% for first time since 2009

ANNUAL UK inflation was last month below the 2% target for the first time since November 2009, official figures have revealed, providing further scope for base rates to remain at a record low to help create a sustainable recovery.

Data published yesterday by the Office for National Statistics showed that annual UK consumer prices index (CPI) inflation fell from 2% in December to 1.9% in January, once again coming in below the City's forecast and falling below the target set for the Bank of England by the Treasury.

The City had forecast annual inflation, which has fallen from 2.9% since last June, would have stayed stuck at 2% in January.

Liz Cameron, chief executive of Scottish Chambers of Commerce, said: "This fall in inflation to below the Government target is good news for businesses and underlines the fact that the Bank of England was right to remind us last week that low interest rates are here for some time to come.

"The economic signs are looking good at the moment, but it is important to remember that, if the recovery is to be sustainable, then businesses must have the confidence to invest for future growth. We are picking up some signs from our surveys that this is happening but it needs to improve further."

Bank of England Governor Mark Carney said last week: "As yet, the recovery is neither balanced nor sustainable. A few quarters of above-trend growth driven by household spending are a good start, but they aren't sufficient for sustained momentum."

Movements in the prices of DVD films helped push down the annual inflation rate in January. And prices in the furniture and household equipment category fell more sharply in January, month-on-month, than in the opening month of 2013.

Esmond Birnie, accountancy firm PricewaterhouseCoopers' chief economist in Scotland, said the latest fall in annual CPI inflation reflected "some very aggressive discounting as High Street retailers competed for footfall and revenues in the January sales".

He believed the continuing fall in inflation would ease some of the pressure on households. But he also highlighted the fact that pay rises remained well adrift of annual CPI inflation.

Figures published last month by the Office for National Statistics showed annual growth in average pay was only 0.9% in the three months to November.

Presenting the Bank of England's latest quarterly inflation report last week, Mr Carney also highlighted near-record proportions of people working part-time because they could not find full-time jobs, and signalled a rise in interest rates was not imminent.

Samuel Tombs, UK economist at consultancy Capital Economics, said: "We think that CPI inflation could fall to as low as 1% later this year, and will remain subdued thereafter. This should enable real pay to rise for the first year since 2007, and allow the MPC to keep interest rates on hold until late 2015."

He added: "While January's figure matched our forecast, it was the fifth consecutive month that inflation has undershot the consensus forecast."

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "Marginally below-target inflation facilitates the Bank of England keeping interest rates down at 0.5% where we believe they are highly likely to stay through 2014 and during the early months of 2015.

"While encouraged by the economy's recent stronger performance, the Bank of England is stressing that it is not taking sustained recovery for granted and very much wants to see it become more balanced, with business investment and exports increasingly kicking in."

Annual UK inflation, on the old all-items retail prices index measure, rose from 2.7% in December to 2.8% in January.

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