Good news about the price level today - The Guardian reports that the Consumer Price Index (CPI), the measure of the cost of living, has seen a drop from 2.2% at the start of the year to 1.8% last week.

The fall has silenced calls for the Bank of England to change the policy of stimulus that has been adopted for the last couple of months. It is now expected that we will carry on in a period of ultra-low interest rates.

It is the first time that inflation has been within the Bank’s Monetary Policy Committee’s (MPC) target of 2.0% since September 2007, and which has since then  peaked at 5.2% last September following increases in oil prices. However inflation remains higher than the average EU level at 0.7%, and the 16 country Eurozone 0.15%. Analysts now worry we may experience deflation which could be damaging to the economy.

The driving forces behind the lower prices were food and non-alcoholic drinks, which fell to 5.4% last month from 7.8% the month before. Furniture has also seen price falls after there has been no impetus to put up prices before a summer sale, caution being spread by companies shaken by the collapse of MFI.

In the wider economy, Brendan Barber, the Trade Union Congress (TUC) general secretary warns of a period of deflation as having a detrimental impact on jobs, growth and investment. However, Adam Posen believes the British economy could soon return to growth by as soon as 2010, though he doesn’t expect it to be a ’smooth ride’.

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