Official figures show that the annual rate of Inflation in the UK slumped to a five-year low during September.
The Consumer Prices Index (CPI) fell from 1.6% to 1.1% over the month, according to the Office for National Statistics (ONS). The measure was last at this level in September 2004.
Inflation dropped further than economists expected in the month. This will lead to renewed fears that Bank of England Governor Mervyn King will have to write his first letter to the Chancellor explaining why CPI has undershot the 2% target by more than a percentage point.
Household energy bills were the biggest contributor to the fall in CPI, as this year's unchanged gas and electricity prices have been compared with big rises in 2008. Several major energy suppliers hiked their prices in September last year.
The housing and household service sector, which includes energy prices, fell to minus 1.1% across the month, the lowest figure since the current measure of CPI started in 1997. Food inflation was minus 0.9% between August and September, its largest decline across those two months since 2006.
Meat prices fell in the month, while there was also a small downward effect from fruit. Previously transport costs, driven by soaring petrol prices, have kept the CPI rate from falling faster. Transport remained the biggest upward contributor in the month, as the average price of petrol increased.
The wider Retail Prices Index (RPI) measure, which includes house prices and mortgage interest payments, has been negative since April. Much lower mortgage interest payments compared with last year have kept the measure below zero.
RPI also lost ground in September, falling to an annual rate of minus 1.4%, compared with a 1.3% decline in August.
UK economy 'frail', says report
A survey of more than 5,500 firms has casts doubt on whether the UK emerged from recession between July and September.
The British Chambers of Commerce (BCC) said business confidence was improving but warned the economy was still 'frail'.
The business lobby group's latest quarterly survey showed confidence among manufacturers and services firms at its highest point since the start of 2008 - before the recession began - but several indicators remain negative.
The BCC's chief economist, David Kern, said: 'The third-quarter results support our assessment that the UK economy is on the brink of leaving recession. However, the improvement is not sufficiently strong to allow us to conclude without doubt that GDP has already returned to positive growth.'
Official estimates are due next week on the performance of the economy in the third quarter of this year. If the economy remains in the doldrums it will be the first time the UK has endured six successive quarters without growth.
The BCC's survey showed 'significant' improvement among manufacturers although none of its indicators on domestic sales and orders or exports are in positive territory. Among services firms, the BCC found export sales and orders had returned to slim growth although domestic demand is still declining.
The survey data comes after worse than expected manufacturing output figures showed a surprise decline in August. The BCC predicts a 4.3% slide for the UK economy this year and anaemic 1.1% growth in 2010 as a weak recovery gets under way.
Meanwhile, British retailers have warned that consumer sentiment remains fragile despite the best sales growth since April last month.
The British Retail Consortium (BRC) recorded a 2.8% rise in like-for-like sales - but this was against comparisons with collapsing sales a year earlier at the height of the financial crisis. Retailers also benefited from much better weather last month in contrast to the wet September seen last year, the BRC added.
Director general Stephen Robertson said there was 'some room for optimism' in the results but warned against 'getting carried away'.
