Inflation tumbles in June

Group Business Editor

Wednesday 18 July 2012

ANNUAL UK inflation tumbled from 2.8% in May to 2.4% last month and this drop, which wrongfooted an again over-hawkish City, was viewed as helping pave the way for further monetary stimulus for the troubled UK economy.

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ian mcconnell business editor

The fall in annual consumer prices index inflation, revealed in data published yesterday by the Office for National Statistics, resulted partly from a sharp drop in clothing prices amid signs that retailers started their summer sales earlier than usual to clear stock that had remained on the shelves because of grim weather.

The annual CPI inflation rate for June is the lowest since November 2009, when it was 1.9%. The City had forecast an unchanged rate of 2.8% for last month, proving too hawkish in its forecast for a third consecutive month.Prices in the clothing and footwear category tumbled by 4.2% between May and June. This was a much sharper drop than a comparable 1.9% month-on-month fall in June last year. The ONS cited "reports of the summer sales starting earlier than last year". However, it noted that the price of football shirts had exerted an upward influence on the inflation rate, as attention focused on the Euro 2012 championships.A second consecutive monthly fall in petrol and diesel prices meanwhile helped the annual inflation rate move lower. The UK is back in recession, with gross domestic product having dropped by 0.4% in the fourth quarter of last year and by 0.3% in the opening three months of 2012.The Bank of England raised its quantitative easing programme by £50bn to £375 billion this month. QE is aimed at stimulating economic activity by boosting money supply through the purchase of Government and corporate bonds using central bank reserves.In its latest inflation report in May, the Bank forecast annual CPI inflation would undershoot its 2%, Treasury-set target on a two-year time horizon if UK base rates were to remain at their record low of 0.5% and QE were to stay at its then-£325bn level throughout this period.Economists voiced hopes yesterday that the fall in inflation in June might relieve some of the huge pressure on consumers, who have seen real incomes squeezed sharply at a time of low or non-existent pay awards.Vicky Redwood, chief UK economist at consultancy Capital Economics, believed the early start of clothing shops' summer sales "probably reflects retailers trying to shift their summer ranges given that the recent poor weather has dented sales".While noting this effect might therefore be "temporary", she said: "Past falls in cotton prices should also be putting downward pressure on clothing inflation. And inflation nudged down in other sectors such as household goods, where poor weather has recently supported sales."Ms Redwood added: "Overall ... tentative evidence is building that the weak activity and large amounts of spare capacity in the economy are bearing down on underlying price pressures. "The MPC would not have seen these figures at its (July 4 and 5) meeting, but clearly they vindicate its decision to do more quantitative easing. We still think that CPI inflation could be below 1% by the end of the year and is likely to stay very low throughout next year."Howard Archer, chief UK economist at consultancy IHS Global Insight, described the inflation figures as "very good news for both consumers and the Bank of England".He added: "This reduces further the squeeze on consumers' purchasing power and facilitates further quantitative easing by the Bank of England later this year should the economy fail to show underlying improvement over the coming months."Mr Archer pointed out that annual CPI inflation is "now less than half the peak rate of 5.2% seen in September 2011" and "getting much closer to annual earnings growth". Annual inflation on the old all-items retail prices index measure fell from 3.1% in May to 2.8% in June.

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Inflation tumbles in June

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