U.K. Inflation Falls to Lowest Since January 2008


Inflation last month fell to its lowest level since the beginning of last year, with the retail price index dropping for the second month in a row – putting further downwards pressure on wages.

The consumer price index was 2.3 per cent higher in April than a year ago, the slowest pace of inflation since January 2008, the Office of National Statistics reported on Tuesday. That was below expectations of a 2.4 per cent rise in prices after consumer prices rose by 2.9 per cent in the year to last month.

The smaller rise in the CPI brings it closer to the Bank of England’s 2 per cent target for inflation.

However, the Bank said last week that it expected inflation to fall far below target this year and to rise to just above 1 per cent in two years as lower commodity prices, the recession and soaring unemployment help drag down demand.

While the CPI slows, the retail price index, a longer standing measure that is tied to many private and public sector contracts, fell by the most since records began in 1948. The RPI was 1.2 per cent below its level last year in April, after falling by 0.4 per cent in the year to March.

The drop in RPI came as mortgage interest costs have plummeted following cuts in the Bank’s base rate to 0.5 per cent from 5 per cent last autumn, as well as efforts to further ease monetary policy through the introduction of quantitative easing.

Excluding mortgage interest payments the RPI rose by 1.7 per cent over the year, after a 2.1 per cent increase in March. Many wage deals, pensions and benefits as well as index-linked gilts are tied to the RPI index.

Both the RPI and the CPI have remained stronger for longer than many economists and the Bank have expected, largely because of the effect of the sharp depreciation of sterling since the financial crisis began. But the sharper than expected drops this month in the CPI may suggest that the effect of higher import costs are beginning to wane.

CPI has slowed as electricity and gas bills continue to fall, and annual food prices inflation have fallen for the second month in a row to their lowest since last May. Restaurants and hotels saw inflation hit its lowest since records began in 1997 while games toys and hobbies prices fell. Meanwhile, alcohol and tobacco inflation fell due to the late Budget this year, meaning taxes were lower in April. Car, communication and clothing prices all rose more quickly than a year ago.

Inflation excluding volatile energy, food drink and tobacco prices rose by 1.5 per cent, down from 1.7 per cent in March.


TradingEconomics.com, Bloomberg
5/19/2009 9:12:10 AM