Inflation tipped for further fall

The squeeze on consumer spending continued to loosen its grip in June as inflation hit a 31-month low, figures tomorrow are expected to show.

The consumer price index (CPI) measure of inflation is forecast to dip to 2.7% in June from 2.8% in May, as fuel and food prices continue to ease.

Last month, a sharp drop in commodity and oil prices paved the way for the smallest rise in fuel prices since October 2009, dragging down the headline inflation rate.

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.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Apart from their direct impact on the inflation rate, lower petrol prices also reduce the cost of transporting goods around so that should also have helped to limit inflation. It is also likely that annual food price inflation fell in June."

Petrol prices should have fallen overall during June after oil prices retreated further from their March peak levels, with Brent crude averaging around 95 US dollars a barrel in June, compared to 110.2 US dollars a barrel in May.

The economy entered a technical recession in the first quarter of the year, with gross domestic product declining 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.

The British Retail Consortium (BRC) Shop Price Index fell to 1.1% in June, from 1.5% in May, as the falling cost of crude oil and raw materials filtered through to store prices.

Victoria Cadman, economist at Investec, said inflation should continue to moderate beyond June, which will be welcomed by the Bank of England's Monetary Policy Committee (MPC) after it recently injected a further £50 billion into its quantitative easing programme.

She said: "With the MPC having just eased policy in an effort to get the UK economy off its knees, this would be welcome news and particularly so if the committee is later forced to consider further easing still."

PA