Inflation expected to remain at 3%

Inflation figures published tomorrow are expected to show that the squeeze on consumer spending maintained its grip in May.

While many economists expect further falls in the consumer price index (CPI) measure of inflation in the months ahead, the rate for last month is expected to remain at 3%.

The unchanged figure follows a sharp drop in April, when CPI fell to 3% from 3.5% in March, its lowest level since February 2010, according to the Office for National Statistics (ONS).

Inflation has fallen from 5.2% last September due to the waning impact of the VAT hike at the start of 2011, falling energy, food and commodity prices and a number of bill cuts from utility providers in February.

However, oil prices rose in March amid fears over increasing tensions between the West and Iran and have had a lasting impact, despite pulling back in recent weeks.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Consumer price inflation should head down further over the coming months, although it may hover around 3% in the near term due to the lingering impact of the sharp rise in oil prices at the start of the year."

The British Retail Consortium (BRC) Shop Price Index rose to 1.5% in May, from 1.3% in April, with the marginal rise being driven by non-food prices while food prices held for the second month in a row.

Further declines in inflation would bolster the case for the Bank to pump more emergency cash into the economy through its quantitative easing programme, as the eurozone crisis escalates and threatens to destabilise the UK economy.

The economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2%, following a 0.3% drop in the final quarter of 2011.

The weaker growth has started to weigh on prices as retailers sacrifice profit margins in a bid to draw in cash-strapped consumers.

A survey by Lloyds TSB showed that families were £34 a month worse off in May, compared to a year ago, as discretionary spending power continued to fall.

The report said the decline illustrates that conditions for consumers remain tough, largely due to weak income growth.

PA