Inflation falls to 26-month low

Inflation fell to its lowest level in more than two years last month, official figures showed today, as high street discounting took the pressure off household budgets.

The Consumer Price Index (CPI) rate of inflation fell to 3% in April, compared with 3.5% in March, its lowest level since February 2010, the Office for National Statistics (ONS) said.

In further evidence that the weak economic climate is forcing retailers to cut prices to draw in customers, clothing and footwear prices rose by just 0.2% in the period compared with 1.4% last year.

And softer excise duty rises on alcohol and tobacco, as well as lower air fares due to the timing of Easter, also helped keep a lid on the rising cost of living.

Bank of England Governor Sir Mervyn King narrowly avoided sending his 10th “Dear Chancellor” letter to explain why inflation is higher than the Government's 2% target, as at 3% it is now within one percentage point of that goal.

Inflation has fallen from 5.6% 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.

However, it has not dropped as quickly as the Bank of England expected after fears over increasing tensions between the West and Iran pushed oil prices higher in March.

The sharp decrease in inflation in April is likely to bolster the case for the Bank to pump more emergency cash into the economy through its quantitative easing programme.

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.

Chloe Smith, the economic secretary to the Treasury, said: "Inflation is down and back within the target range for the first time since 2010, which is good news and will provide some welcome relief for family budgets."

The most significant downward pressure on prices in April came from the transport sector, which saw prices rise 1.2% compared with a 2.8% rise the previous year.

The largest downward effect came from air transport where the timing of Easter meant fares rose 7.4% compared with a huge 29% surge last year.

A smaller downward impact came from second-hand cars, the ONS said, where prices rose by less than a year ago.

Alcohol and tobacco prices rose 2.9%, compared with a record 5.3% rise last year, as excise duty rises in the March Budget had a smaller impact on overall prices.

The softer rise in clothing prices was driven by cheaper womenswear, the ONS said.

Retailers have kept prices low and sacrificed profit margins in a bid to draw in cash-strapped consumers, whose confidence has been knocked by the weak economic climate.

The most significant upward contribution came from restaurant and hotel prices, which rose 1% compared with a 0.6% increase a year ago.

Housing and household services also had an upward effect as lower utility bills were overshadowed by higher rents.

Alternative measures of inflation also fell, as the Retail Price Index fell to 3.5% from 3.6% in the period.

The Chancellor of the Exchequer welcomed today's drop in inflation.

Speaking at a press conference in the Treasury, George Osborne said: "It means that for the first time since I became Chancellor, I have not this morning received a letter from the Governor of the Bank of England explaining why inflation is off-target. Indeed, it is the first time since 2009 this has happened.

"This brings welcome relief to families on tight budgets and the Bank of England expects inflation to continue to fall further over the next year or so.

"Unemployment has also fallen this month, but it remains too high and we need to do even more to help."

Labour Treasury spokeswoman Catherine McKinnell said: "The fall in the rate of inflation is welcome as last year's VAT rise continues to drop out of the figures. But families and pensioners are facing a harsh squeeze on their incomes from the Government's policies.

"The independent Institute for Fiscal Studies says a family with children will lose an average of £511 from changes coming into force this year. And while millions are paying more, the Government is giving a £3 billion tax cut to millionaires.

"With the economy pushed into recession by this Government's economic mistakes, those on low and middle incomes are paying a heavy price from this out-of-touch Government's unfair choices."

PA