Sharp fall in rate of inflation

Inflation fell sharply last month, revisiting November's low after a change in food prices affected figures, data showed today.

Inflation fell sharply last month, revisiting November's low after a change in food prices affected figures, data showed today.

Underlying inflation fell from the 2.3 per cent recorded in April to just 1.8 per cent in May, figures from the Office for National Statistics showed.

The figure is the lowest since ONS started monitoring the series in 1975, although these lows were hit in January 2001 and November 2001. It is the sharpest month on month fall since October 1993.

The data is also lower than the 2.0 per cent economists were predicting.

In addition, the ONS figures showed headline inflation – which includes mortgage interest payments – fell to 1.1 perr cent, from 1.5 per cent in April, and again below economists' forecasts of 1.3 per cent.

The main influence on inflation was food prices as there was no repeat of sharp price rises seen this time last year.

Last May, there were sharp price rises for potatoes and fresh vegetables as a result of flooding during the month.

A further downward impulse came from petrol prices which fell slightly this May compared with May 2001.

Newspaper prices also had an impact, following a round of price cuts by some national daily papers.

Some economists had been predicting an interest rate rise in July. But Philip Shaw, economist at Investec, said: "Really, the outlook for interest rates remain unclear."

He said figures over the next two days – when retail sales data and the Bank of England's minutes are released – should make a decision clearer.

Deborah Read, UK economist at Bank of America, said: "I think it reduces the risk we see of a move (in interest rates) coming through in July.

"The fact inflation has dropped does provide them with the time to delay any hikes."

She said a rise in July was now a "close call". If retail sales data on Thursday was "softish" it would give the Bank of England more reason to hold on to August or even September before raising rates.

TUC general secretary John Monks said: "The fall in inflation this month was exceptional and due to temporary factors.

"But the underlying position is one of continued stability. We can see no sign of either higher housing prices or consumer demand feeding into the overall inflation rate.

"With moderate average earnings and pay settlements, we can see no case for an interest rate rise next month."