A SUPERMARKET price war and cheaper air fares and petrol caused the rate of inflation in Britain to slow to 5 per cent in October, ending its relentless march higher in 2011 and prompting economists to predict it will fall sharply in the months ahead.

The annual increase in the consumer price index peaked at 5.2 per cent in September. With the cost of petrol, food and air travel all dropping in October, having risen in the same month in 2010, the overall rate of inflation was pushed down.

Even though inflation has begun to fall as economists had expected, the annual rate remains well above the Bank of England’s 2 per cent target, prompting another letter of explanation from Sir Mervyn King, Bank governor, to George Osborne, chancellor.

Sir Mervyn wrote that he judged “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”.

He can make the prediction because large price rises that occurred towards the end of 2010 are beginning to fall out of the inflation calculation, since they happened over a year ago.

Inflation will fall sharply as this process accelerates in early 2012 once the rise in VAT to 20 per cent no longer counts in the measure.

Even though Sir Mervyn can point to lower inflation ahead, the average rate tolerated by the Bank of England over the past four years has been 3.5 per cent, far above target.

He said the bank had used low interest rates and money printing to “ease the adjustment” to higher energy and import prices.

But Ed Balls, shadow chanc-ellor, blamed the weak growth and squeezed incomes on the government’s deficit reduction plans.

EU figures yesterday showed annual growth in the third quarter was lower in Britain than in every other EU country apart from Greece, Cyprus and Portugal. – (Copyright The Financial Times Limited 2011)