Inflation falls much less than expected

Easing pressure on food prices and lower energy bills have pushed inflation to its lowest level since January last year, official figures showed today.

The Consumer Prices Index (CPI) edged lower to 2.2 per cent in May from 2.3 per cent in April, the Office for National Statistics (ONS) said.

But experts had been expecting a even steeper fall - to below the Bank of England's 2 per cent inflation target for the first time in almost two years.

The smaller-than-expected fall in the CPI came as the impact of April's Budget duty hikes and higher DVD prices put upward pressure on the figures, the ONS said.

The figures showed food prices rising by less than a year ago in May, while electricity bills fell this year compared with unchanged prices 12 months earlier.

But this was offset by price hikes for alcohol and tobacco over the month following Chancellor Alistair Darling's Budget. Last year the Budget - and its duty increases - came into effect a month earlier.

And the weaker pound is also pushing up import prices, with DVDs and television prices rising this year compared with falling prices a year ago, ONS statisticians indicated.

The CPI measure has now been above target for 20 months, although, according to the Bank of England's forecasts, it is set to fall to 1 per cent or lower later this year as the recession bears down on prices.

A fall below 1 per cent would prompt a first letter from Governor Mervyn King to the Chancellor to explain why CPI has undershot the inflation target.

The headline Retail Prices Index - which includes housing costs and mortgage interest payments - also showed a surprise rise on the month.

Deflation under the RPI measure had been expected to increase to minus 1.5 per cent in May - but the figures showed it easing to minus 1.1 per cent, due to a slight rise in average mortgage interest payments.

This contrasted with mortgage interest payments falling a year earlier following the Bank of England's 0.25 per cent rate cut in April 2008, adding to inflationary pressure. Car prices also rose compared with falls a year earlier, the ONS added.