UK economy could get another emergency cash injection next month after surprise fall in inflation


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The Independent Online

The UK economy could get another emergency cash injection as early as next month after figures today showed a surprise drop in inflation.

Falling petrol prices meant the Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, down from 3% in April and the lowest level since November 2009. City analysts expected the rate to remain unchanged.

Inflation has fallen from 5.2% last September and with further declines expected this year the Bank of England should have more leeway on its quantitative easing (QE) programme, which currently stands at £325 billion and was last increased by members of the Monetary Policy Committee in February.

As well as announcing radical measures to prevent a second credit crunch, Governor Sir Mervyn King's annual Mansion House speech last week gave a strong hint that more QE was on the cards.

Analysts said it looked likely that further action could be taken as soon as July 5, when the committee concludes its next two-day meeting.

Vicky Redwood, UK economist at Capital Economics, said: "Mervyn King has already hinted strongly that more quantitative easing will soon be forthcoming and these figures might help to tip any of the more reluctant members into voting for more stimulus at the upcoming meeting."

Today's decline in inflation was driven by petrol pump prices, as the average petrol price fell by 4.5p per litre between April and May to stand at 137.1p. Last year, the average petrol price rose 2p to 136.3p.

The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices as the global economy weakens have reduced the pressure on household budgets.

Fears over increasing tensions between the West and Iran pushed oil prices higher in March but the cost of crude oil has fallen since then and May's inflation figure shows that this is starting to benefit consumers.

Average diesel prices also decreased, dropping 4.4p to 143.3p between April and May, compared with a 0.7p rise last year to 141.5p.

Britain's 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.

Last month, inflation moved to within 1% of the Government's 2% target, meaning Sir Mervyn did not have to send a letter of explanation to the Chancellor.

A Treasury spokesman said: "Inflation is out of open letter territory for the second month in a row, which is good news and is providing some welcome relief for family budgets."

In further evidence that the weak economic climate is forcing retailers to cut prices to draw in customers, food and drink prices rose by just 0.3%, compared with a much steeper 1.3% rise last year.

The ONS said this was driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell.

Elsewhere, the ONS said the cost of recreation and culture also had a downward effect on overall prices, driven by games, toys and hobbies and photographic equipment.

The most significant upward contribution came from air and sea fares, but these were distorted by the timing of Easter in 2011 and 2012 and the subsequent difference in the timing of school holidays.

Air fares rose 1.4% this year, compared with an 11.1% drop last year, while sea fares rose 2.6%, compared with a 14.7% fall last year.

Alternative measures of inflation also fell, as the Retail Price Index fell to 3.1% in May, from 3.5% in April.