'Disappointing' inflation drop less than expected

Consumer Price Index (CPI) inflation fell in January to 3.0%, just 0.1 percentage points below December 2008's figure of 3.1%.

The drop is smaller than most analysts had expected, with the consensus prediction having been a fall to 2.7%.

However, Retail Price Index (RPI) inflation, which includes the cost of mortgage repayments, plunged from 0.9% to 0.1% - its lowest level for more than 48 years. Most analysts now predict that the measure will fall into negative territory when February's figures are announced next month.

CPI inflation remains above the Bank of England's Government-set target of 2.0%, increasing the likelihood that the Bank will again lower the interest rate, which has fallen from 5.0% to a record low of 1.0% in five months.

"It's very disappointing," said David Page of banking group Investec.

"Inflation is not coming down as quickly as we had anticipated and suggests there is still some lingering [inflationary] pressure."

In the medium term, the Bank predicts that CPI inflation will fall well below 2.0%. Last week, Bank of England governor Mervyn King hinted that the risk of very low inflation - or deflation - might require "further easing in monetary policy... likely to include actions aimed at increasing the supply of money".

It is thought that such actions might include quantitative easing - the injection of additional money into the financial system, as used earlier in the decade by the Bank of Japan.