Inflation at lowest rate for five years

Sep 16 2009 by Iain Laing, The Journal

INFLATION slid to its lowest level in almost five years during August as food and energy price rises slowed.

The Consumer Prices Index (CPI) fell from 1.8% to 1.6% over the month, according to the Office for National Statistics (ONS). It was last lower in November 2004.

Unchanged household energy bills this year compared with big hikes 12 months earlier dragged down the rate of inflation, along with falling food prices, the ONS said.

Wide-ranging price falls for products such as cereals, bread and cakes helped bring the annual rate of food inflation to 1.9% over the month, which is the lowest for more than three years.

But despite the downward pressure on inflation, the overall CPI measure did not fall as far as the 1.4% forecast by most City commentators.

Many have predicted that Bank of England Governor Mervyn King will soon have to write his first letter to the Chancellor explaining why CPI has undershot the Bank’s 2% inflation target by more than 1%.

The smaller-than-expected fall in the CPI was due to soaring petrol prices, with the average litre of petrol rising 1.1p to 103.8p.

The price of second-hand cars also rose at its fastest ever rate for the month, up 2.2% and are now 4.4% higher than a year ago.

The British Chambers of Commerce (BCC) said the Bank of England should not unwind measures such as record low interest rates and its £175bn programme to boost the money supply, despite the higher-than-expected inflation data.

“Signs of recovery remain fragile, and the main policy priority is to avoid a setback,” chief economist David Kern said.

IHS Global Insight economist Howard Archer said the figures did not change his expectations of interest rates at 0.5% “well into 2010”.