Weak Pound Curbs Fall in UK Inflation

Inflation fell in May to its lowest since the beginning of 2008, but remained higher than most economists expected.

The smaller than expected fall in consumer price inflation from 2.3 per cent in April to 2.2 per cent last month, compares to economists’ expectations for a drop to 2 per cent.

However, the retail price index fell by 1.1 per cent in May compared with prices a year ago, the Office for National Statistics reported. The fall was the second consecutive month of annual declines, although slightly less of a drop than the 1.2 per cent fall seen in April.

The CPI has fallen for the last three months and is well below its the recent peak of 5.2 per cent last September, which was brought on by soaring oil prices. It is now at its lowest since January of last year.

Many economists and the Bank of England have put the recent strength of inflation down to the sharp fall in sterling over the course of the financial crisis, driving up the price of imports. UK inflation remains well above that in the rest of the EU and the eurozone.

After the weaker pound worked its way into price levels, the UK economy still has to face the impact of higher unemployment on demand and inflation. The sharp fall in energy and commodity prices since last summer should also mean inflation falls much further by this autumn.

The Bank’s long term forecast is for inflation to fall below its 2 per cent target for an extended period of time.

The rate of food price rises moderated after rising quickly earlier this year, and utility bills fell. Clothing and footwear prices fell sharply compared to a year ago. The impact of higher taxes introduced on alcohol and tobacco in the Budget were also felt last month.

The RPI fell as lower interest rates than a year ago meant that mortgage interest payments were lower. However, over the month mortgage costs actually rose, compared with a year ago when the Bank cut rates.

Weak Pound Curbs Fall in UK Inflation

Tradingeconomics.com, Financial Times
6/16/2009 8:30:20 AM