ANNUAL UK inflation fell unexpectedly from 3% in April to a two-and-a-half-year low of 2.8% in May, official data has revealed, paving the way for the Bank of England to provide further monetary stimulus to the recession-hit economy.
The fall in inflation points to some easing of the huge pressure on household budgets, as well as giving the Bank's Monetary Policy Committee greater scope to support the economy as the Coalition Government's spending cuts weigh on consumer confidence and the eurozone crisis looms large.
A 4.5p fall last month in the price of a litre of petrol, to £1.37, and a much smaller rise in the price of food and non-alcoholic beverages this May than last played significant parts in pushing down the annual consumer prices index inflation rate.
And clothing and footwear prices fell by 0.1% last month, having risen by 0.4% in May 2011.
The fall in inflation took the City by surprise when it was announced by the Office for National Statistics yesterday. The consensus forecast among economists had been that annual consumer prices index (CPI) inflation would have remained at 3% last month.
May's 2.8% figure is the lowest since a rate of 1.9% in November 2009, although still above the 2% target set for the MPC by the Treasury.
The MPC last month projected that annual UK CPI inflation would undershoot the 2% target on a two-year time horizon even if base rates were to remain at a record low of 0.5% and the scale of a quantitative easing programme aimed at stimulating activity were to be held at £325 billion.
The UK fell back into recession with a second consecutive quarterly fall in gross domestic product in the opening three months of this year.
UK GDP fell by 0.3% in both the final three months of 2011 and the first quarter of this year, and economists fear another decline in the three months to June given a slew of weak economic indicators and the extra bank holiday for the Queen's Diamond Jubilee.
The UK's domestic economic troubles have been exacerbated in recent months by an escalation of the eurozone crisis.
Spain's latest bond auction yesterday underlined the high interest rates which it is having to pay to raise debt, and the situation in Greece remains grim.
Esmond Birnie, chief economist in Scotland and Northern Ireland for accountancy firm PricewaterhouseCoopers, said: "Declining oil prices are beginning to feed through into petrol and diesel prices at the pumps, retailers are engaged in some aggressive price cutting and even the cost of some fruit and vegetables have fallen sharply, thanks to a bumper harvest."
He added: "Whilst inflation remains above the Bank of England's 2% target, (the) data could be significant on a couple of fronts. First, the Monetary Policy Committee may judge that it gives them more room for manoeuvre for possibly introducing further quantitative easing. And, second, anything which reduces the previously severe squeeze on household disposable incomes might stir a revival in consumer spending and hence turn the economy to a more general and durable recovery."
Quantitative easing, implemented through the purchase of Government and corporate bonds using central bank reserves, is aimed at increasing money supply and stimulating activity.
Bank of England Governor Sir Mervyn King, in his speech to the City at the Mansion House in London last week, highlighted the potential to increase QE further if needed.
Minutes of the nine-strong MPC's June 6 and June 7 meeting will today provide further clues on how close committee members might be to sanctioning further quantitative easing.
Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "The MPC would not have seen these figures at its meeting earlier this month. 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."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article