UK inflation for May falls to 2.8%, below market expectations

UK Inflation falls below expectation

UK inflation fell in May to its lowest level in two and a half years, the Office for National Statistics (ONS) reported today, surprising experts who had predicted no change in the rate.

The Consumer Prices Index (CPI) measure of inflation fell to 2.8% from 3% in April and the Retail Prices Index (RPI) measure dropped to 3.1% from the previous level of 3.5%. The decrease in inflation was primarily due to lower oil prices which resulted a 3.1% fall in the price of fuels and lubricants.

Petrol prices fell by GBP0.045 per litre from the previous month to stand at GBP1.37 per litre, while diesel prices were down GBP0.044 per litre to GBP1.43 per litre.

Also contributing downward pressures to the change in CPI inflation between April and May were smaller price rises for food and non-alcoholic beverages. Food and drink prices rose by just 0.3%, compared with a 1.3% increase a year ago.

Partially offsetting these factors was upward pressure from travel costs such as air and sea transport, with the timing of Easter contributing to differing price movements in 2011 and 2012.

Inflation had already fallen in April from 3.5% in March and economists had expected the rate to be unchanged in May. The annual rate is down from 5.2% last September and is now the lowest since November 2009, when it was 1.9%. Prices are predicted to fall further in the coming months.

Although at present inflation remains above the Bank of England’s target of 2%, the latest fall increases the likelihood of more quantitative easing (QE) from the Bank of England because it indicates that further action can be taken to stimulate the economy without causing a surge in prices.

Sir Mervyn King, Governor of the Bank of England, hinted last week that another round of QE was an option for the future, saying that “the case for a further monetary easing is growing.”

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