Savers and spenders could gain from falling inflation

In better news for savers and spenders, intense competition between desperate retailers over the festive period is set to trigger the steepest monthly fall in inflation since 2008.

The Bank of England's Consumer Prices Index, which exceeded 5% during the final quarter of 2011, is expected to fall to 4.2% this week.

The British Retail Consortium reports that December's sales performance was the best since January, and improved markedly on November’s dip, but that trade was supported by promotions.

To BRC Director General, Stephen Robertson, there is no sign of any fundamental change in consumers’ circumstances.

"For many customers, economic reality has bitten again since the New Year and, with consumer confidence returning to levels last seen during the recession, 2012 is expected to be an equally challenging year."

According to the BRC, the rate of non-food inflation hit a two year low of 0.3% last month as retailers slashed prices on clothing and electrical goods. This offers good news for consumers who saw real income and living standards fall throughout 2011.

"Even before the impact of last January's VAT rise comes out of the year-on-year comparisons, shop price inflation has reached a 16 month low of 1.7%", Mr Robertson said.

Retailers were praised by the consortium for remaining competitive against a backdrop of soaring utility bills.

For consumer analysts Nielsens, non-food retailers have anticipated the need for consumers to save money, while food inflation fell towards the end of last year because supermarkets had to work harder to encourage customers to shop.

With signs of inflation beginning to fall, saving will become an increasingly attractive option. A 1-year First Save fixed-rate bond, for example, returns 3.45%. A 3-year fixed-rate bond from Vanquis returns 4.15%. See Which4U's savings account rates for a range of the most competitive savings products on the market.

Mark Hornby