Inflation Falls To Two Year Low | Prepaid365

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20 June 2012

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The rate of inflation in the UK fell to its lowest for more than two years last month, the Office for National Statistics (ONS) has revealed.

The Consumer Prices Index (CPI) was found to have fallen to 2.8% in May, down from 3% in the previous month. The other measure of inflation, the Retail Prices Index (RPI), fell to 3.1%, down from 3.5% in April.

The decline has been put down to a reduction in both fuel and food prices. It came as a surprise to most economists and industry experts, who had expected inflation to remain unchanged in May.

As a result of the sudden decline, many economists are now saying that further decreases in inflation can be expected in the coming months.

“Expect further falls in inflation as energy bills rise less over the summer versus last year,” said George Buckley, of Deutsche Bank.

The government welcomed the drop, which edges inflation to its target of 2%. A spokesman for the finance ministry said that the fall was “good news and is providing some welcome relief for family budgets.”

The drop in inflation paves the way for more quantitative easing by the Bank of England (BoE), which has not increased the £325 billion asset purchasing programme since February this year.

“The Office of National Statistics inflation data today was good news for the Bank of England,” said Stephen Jones, head of fixed income at asset management firm Kames Capital.

“With a widely held expectation that the Bank will engage in further monetary policy support for the UK economy – potentially through more quantitative easing – in the next few months any pressure from higher inflation would have been an issue.  As it is, the data today surprised to the downside, with lower than forecast CPI and RPI outcomes both on a month by month and year on year basis.”

The main driver behind the fall in inflation was the price of fuel, as a result of the falling cost of crude oil in the face of global economic turbulence.

Diesel prices were also on the decline, falling by 4.4p to an average of 143.3p between April and May. This is compared to a 0.7p increase at the same time last year.

The cost of food and drink was another key driver behind the inflation fall, as retailers dropped their prices in order to attract consumers. Food and drink prices went up by 0.3%, compared to a 1.3% rise at the same time last year.

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