Inflation drops to lowest level since December 2009

 

Inflation fell by considerably more than expected in June, boosting hopes that the squeeze on incomes could be ending more quickly than previously hoped.

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Consumer Prices Index (CPI) inflation dropped to 2.4 per cent last month, its lowest level since December 2009, according to the Office for National Statistics (ONS).

The fall was driven by lower clothing and footwear prices, which declined by 4.2 per cent over the month. The ONS ascribed this to retailers starting their summer sales earlier than last year.Transport prices also fell 0.5 per cent, due to lower petrol prices which were down three per cent in June.

The consensus of City analysts was that CPI inflation would remain at the 2.8 per cent level recorded in May. Instead, it fell for the third straight month, prompting some economists to argue that inflation will now retreat to the Bank of England's official two per cent target before the end of 2012.

"Inflation is finally within sight of the target and we expect it to be well below the target by the end of the year," said Vicky Redwood of Capital Economics. "Evidence is building that the weak activity and large amounts of spare capacity in the economy are bearing down on underlying price pressures".

The Bank will certainly be relieved by the figures, after its Monetary Policy Committee (MPC) voted this month to extend its £325bn quantitative easing programme by £50bn to support the economy. Some MPC members had expressed concerns that monetary stimulus was feeding through into higher inflation.

Chloe Smith, the economic secretary to the Treasury, said: "Inflation has more than halved since September, meaning a little less pressure on family budgets. This should support high-street spending and growth in the economy in the months to come."

However, price rises are still outstripping pay growth, with total income growing by around 1.4 per cent in the ONS's most recent figures.

"The chances of a sharp upturn in domestic consumer spending driving an upturn in recovery prospects look low," said Victoria Clarke of Investec.

And some economists warned falling inflation might not be sustained.

"The rate of decline could slow," said Graeme Leach, chief economist at the Institute of Directors. "Brent crude oil prices have edged back up above $100 per barrel and America's scorching summer has pushed up global corn and wheat prices sharply."

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