Surprise fall in inflation

Posted on July 12th, 2011 | Categories - Financial News

The UK inflation rate surprisingly fell last month according to the Office for National Statistics (ONS).

The Consumer Prices Index (CPI) fell to 4.2% in June with the Retail Prices Index (RPI), which includes the cost of borrowing, also falling to 5%.

Experts had widely predicted that there would be no change in the two key measures of inflation; the slight fall has therefore come as something of a shock.

Falling prices

The slowdown has been attributed to retailers heavily discounting prices particularly in the clothing and footwear sector where prices fell by 1.9%. Prices also fell for games, toys and hobbies.

The figures released by the ONS back up data from the British Retail Consortium released earlier in the day which showed retailers had discounted significantly and those who did so had seen a small increase in sales.

Core inflation, which does not include fuel and food prices, fell from 3.3% in May to 2.8% in June; its lowest level since November. This may be a sign that weak household incomes are starting to be reflected in the way retailers’ price goods.

However, the cost of food continued to rise with a month on month increase of 0.9%.

Outlook

Despite today’s figures inflation remains well above the Bank of England’s 2% target and has been so for 35 of the past 41 months.

It seems as though the Bank of England’s Monetary Policy Committee (MPC) which sets interest rates, has preferred to keep interest rates low in an effort to stimulate growth, the price being higher than target inflation.

Many economic experts believe that this is a trend set to continue. Howard Archer an economist at IHS Global Insight said, “The retreat in consumer price inflation in June boosts the case for the Bank of England to hold fire on interest rates for many more months to come to give the fragile, faltering economy every chance to develop growth momentum.”

Despite today’s fall many experts believe that inflation is yet to peak and CPI will breach the 5% barrier, mainly due to rising energy and commodity prices.

Inflation 2000 - 2011