Inflation at 18-month low

Jun 17 2009 by Iain Laing, The Journal

EASING pressure on food prices and lower energy bills has pushed inflation to its lowest level since January last year.

The Consumer Prices Index (CPI) edged lower to 2.2% in May from 2.3% in April, but experts had been expecting a even steeper fall – to below the Bank of England’s 2% inflation target for the first time in almost two years.

The smaller-than-expected fall in the CPI came as the impact of April’s Budget duty increases and higher DVD prices put upward pressure on the figures, said the Office for National Statistics.

The figures showed food prices rising by less than a year ago in May, while electricity bills fell this year compared with unchanged prices 12 months earlier.

But this was offset by price rises for alcohol and tobacco over the month following Chancellor Alistair Darling’s Budget. Last year the Budget – and its duty increases – came into effect a month earlier.

And the weaker pound is also pushing up import prices, with DVDs and television prices rising this year compared with falling prices a year ago, ONS statisticians indicated. The CPI measure has now been above target for 20 months, although, according to the Bank of England’s forecasts, it is set to fall to 1% or lower later this year as the recession bears down on prices.

A fall below 1% would prompt a first letter from Governor Mervyn King to the Chancellor to explain why CPI has undershot the inflation target. The headline Retail Prices Index – which includes housing costs and mortgage interest payments – also showed a surprise rise on the month.

Deflation under the RPI measure had been expected to increase to minus 1.5% in May – but the figures showed it easing to minus 1.1%, due to a slight rise in average mortgage interest payments.

This contrasted with mortgage interest payments falling a year earlier following the Bank of England’s 0.25% rate cut in April 2008, adding to inflationary pressure.

Despite UK inflation proving more stubborn than in many other countries, Jonathan Loynes of Capital Economics said there was nothing in today’s figures to suggest a change in expectations for interest rates.

The Bank of England’s base rate is currently at a record low of 0.5%, where it is likely to remain for the next few months.

Mr Loynes added: “While UK CPI inflation is continuing to fall at a relatively sluggish rate, we still believe the downward trend has considerably further to go.

“As such, we see nothing in these figures to suggest that policy conditions will need to be tightened in the foreseeable future.”