Inflation lowest since Nov 2009

There is good news for the economy after official figures revealed inflation had fallen to a two-and-a-half-year low. The Consumer Prices Index measure of inflation fell to 2.8% in May, from 3% in April.

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Economist: 'Fall in inflation is a nice surprise'

The further fall in UK inflation in May is a nice surprise, given that we and the consensus had expected it to hold broadly steady. The fall from 3% to 2.8% was driven by a drop in petrol prices and a fall in food price inflation (perhaps as retailers passed on previous falls in agricultural prices). Admittedly, core inflation nudged up from 2.1% to 2.2%. But this mainly reflects a brief period of sharp discounting this time last year and we had thought it would pick up more sharply than this.

Headline inflation will probably stay around this level in June, but it should then start to fall more quickly and we still think it could be below 2% before the end of the year. Mervyn King’s comments last week indicated that more QE will soon be forthcoming and these figures might help to sway any of the more wavering members into voting for more stimulus.

– Chief UK Economist Vicky Redwood, Capital Economics

Decline in inflation driven by drop in petrol prices

The rate of inflation unexpectedly fell to a two-and-a-half-year low last month, as declining oil prices started to filter through to the petrol pumps.

The average petrol price fell by 4.5p per litre between April and May to stand at 137.1p. Last year, the average petrol price rose 2p to 136.3p.

Inflation has fallen from 5.2% last September due to the waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices, easing pressure on squeezed household incomes.

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Today's inflation figure follows a sharp drop

If the inflation figure remains unchanged today it would follow a sharp drop in April:

  • In April CPI [Consumer Price Index] fell to 3% from 3.5% in March
  • That's the lowest level since February 2010
  • Inflation has fallen from 5.2% last September
  • Previous falls are due to the reduced impact of the VAT rise in 2011
  • Also falling energy and food prices and bill cuts from utility providers
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