Discounts trigger drop in inflation

Pressure on household incomes eased last month as high street discounts in the run up to Christmas triggered the largest drop in inflation in nearly three years.

A fall in clothing prices - driven by retailers slashing prices in a bid to pull in customers - ensured the overall rate of consumer prices index (CPI) inflation dropped to 4.2% in December from 4.8% in November.

Economists said the drop, which came after a sustained period of high prices and slow wage growth, paved the way for the Bank of England to pump billions of pounds of extra cash into the economy and hold interest rates at 0.5% for months to come.

While any decline will be welcomed, there were warnings that savers are still struggling to earn real returns on their money, while CPI is still more than twice the Government's 2% target.

Data provider Moneyfacts said that to beat inflation, a basic-rate taxpayer needs to find a savings account paying 5.25% per year, while a higher rate taxpayer at 40% needs to find an account paying at least 7%.

There are just eight standard savings account that taxpayers can choose to negate the effects of tax and inflation and these are all fixed-rate Isas, Moneyfacts said.

Sylvia Waycot, of Moneyfacts, said: "The wheels of UK finance would shudder to a stop without the nation's savers and yet they still see little reward for their investment."

December's decline was driven by a 2.8% plunge in the price of clothing and footwear, although there was less evidence than expected of the impact of the supermarket price war started in early October, as food prices rose by 1.4% month on month.

The ONS said downward pressure also came from fuel prices, which dropped 0.6%, and alcoholic drinks, which fell 1.5% between November and December.

The fall in clothing prices was driven by a wide range of garments, with a particularly large drop in women's outerwear, the ONS said.