UK inflation falls to lowest since October 2009

Inflation fell to its lowest level in more than five years in May after a sharp drop in air fares and retailers discounted food and clothing prices.

The consumer prices index fell more sharply than expected to 1.5% from 1.8% in April. It marked the fifth month in a row that the official rate of annual inflation was below the Bank of England's 2% target. The last time inflation was as low as 1.5% was October 2009 according to the Office for National Statistics.

Although inflation is back below the target, from a peak of 5.2% in September 2011, it continues to outstrip average wage rises. Annual pay growth during February to April was just 0.9% meaning wages fell in real terms.

Responding to the May inflation data George Osborne said: "Good news that inflation is down to 1.5%, the lowest for five years. Another sign that our long term economic plan is working, but lots more to do."

Economists said that below target inflation and weak wage growth gave Bank of England policymakers flexibility over the timing of the first rise in interest rates, which have been held at 0.5% since March 2009.

At the Bank's last quarterly inflation report in May, governor Mark Carney said the first rise was most likely in the second quarter of 2015.However, last week he appeared to suggest in his Mansion House speech that a rise could come sooner, prompting renewed speculation that the first hike could come before the end of 2014.

Chris Williamson, chief economist at Markit, said: "The lack of wage growth is perhaps the strongest argument to hold rates at their record low for longer and, as long as inflation also remains well below the Bank's 2% target, the case for keeping rates on hold will no doubt prevail. Our expectation, however, is that wages growth is picking up, and that more [rate-setting] monetary policy committee members will consequently join the call for a tightening of policy in coming months, with the first rise in interest rates most likely coming in November."

The pound weakened on the back of the numbers. Sterling, which on Monday had pushed through the $1.70 mark to a five year high against the dollar, slipped to $1.6940 from $1.6977 before the inflation data.

Average air fares fell 3.2% on the month in May compared with a rise of 22% in the same month last year. The huge disparity was down to Easter, which fell in April this year causing prices to rise in that month, but in March last year.

Lower prices for women's clothing was also one of the biggest drivers of lower inflation in May, as were falling food and non alcoholic drinks prices. Food prices are falling partly as supermarkets compete for customers, but also as commodity price pressures have eased following better harvests this year compared with last year.

Danny Alexander, chief secretary to the Treasury, claimed the lower inflation figure as a victory for the Liberal Democrats.

"As a result of our role in government, the Liberal Democrats have created the right climate for the recovery and the country is now getting back on the front foot. Today's inflation figures add to a developing pattern of low inflation, strengthening growth and high levels of job creation."

The annual rate of retail price inflation, traditionally used to calculate wage rises, fell to 2.4% in May from 2.5% in April.

Ian Stewart, chief economist at Deloitte, said low inflation and strong growth in the UK was the "holy grail for economic policymakers".

"We are in the sweet spot of the economic cycle," he added.

Powered by article was written by Angela Monaghan and Katie Allen, for on Tuesday 17th June 2014 11.07 Europe/London © Guardian News and Media Limited 2010


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