ANNUAL UK consumer price index inflation dropped by more than expected in October, falling from 5.2% to 5%, as intense competition between supermarkets helped keep a lid on prices.

The figures, from the Office for National Statistics, will provide some reassurance to the Bank of England on the inflation front. And inflation is set to fall much further in January, when the hike in value-added tax from 17.5% to 20% at the start of 2011 drops out of the year-on-year price comparison.

The drop in inflation will keep alive hopes that the Bank of England’s Monetary Policy Committee could increase its quantitative easing programme, through which it is boosting money supply in an attempt to stimulate the economy, beyond the current £275 billion. UK base rates have been at a record low of 0.5% since March 2009.

In a letter to Chancellor George Osborne explaining why annual UK CPI inflation remained more than one percentage point above the 2% target, published yesterday, Bank of England Governor Sir Mervyn King says: “As the impetus from external price pressures dissipates, and the increase in VAT drops out of the annual comparison early next year, the committee’s best collective judgment is that inflation will fall back sharply in the next six months or so, and continue falling thereafter to around target by the end of next year.”

Highlighting the weakening UK outlook, he adds: “Since my previous letter, world growth has slowed and uncertainty about the prospects for the global economy, and in particular the euro area, has increased.

“Those developments, and accompanying falls in household and business confidence in the United Kingdom, are likely to have weakened the outlook for overall activity in the UK.”