Inflation falls to 2.2%

According to the figures released today (16 June) by the Office for National Statistics (ONS), consumer price index (CPI) annual inflation fell from 2.3 per cent in April to 2.2 per cent in May.

The ONS said that the largest downward pressure affecting the change was from food and non-alcoholic beverages.

A further large downward pressure came from housing and household services, such as electricity bills where tariffs fell this year but were unchanged a year ago. There were also downward pressures from heating oil and private rented property.

Meanwhile, the largest upward pressure affecting the change in the CPI annual rate came from alcoholic beverages and tobacco, where prices rose by more than a year ago, mainly reflecting the increase in excise duty from this year's budget.

Elsewhere, the retail price index (RPI) was -1.1 per cent in May, down 1.1 per cent over the last year and compared with -1.2 per cent in April.

According to the ONS, the main factors affecting the CPI also affected the RPI. However, additionally, there was a large upward pressure from housing, where the largest effect came from mortgage interest payments.

There was also a slight rise in the average mortgage interest payment this year, compared with a fall a year ago, following April 2008's quarter point decrease in the BoE base rate.

Although GDP continued to fall sharply in the first quarter of 2009, there were also signs that the pace of decline has been slowing according to the latest inflation report from the BoE.

Since the February Report, the Monetary Policy Committee has cut bank rate to 0.5 per cent, and announced a programme of asset purchases totalling £125bn. This includes an extension by a further £50bn announced on 7 May, in order to boost the growth of money and credit and of nominal demand.

According to the report, however, CPI inflation is likely to drop below the 2 per cent target later this year.

The report adds that, under the assumptions that bank rate moves in line with market rates and the stock of purchased assets financed by the issuance of central bank reserves reaches £125bn, it is more likely than not that CPI inflation will be below the 2 per cent inflation target in the medium term.

Meanwhile, as an internationally comparable measure of inflation, the CPI shows that the UK inflation rate in April, at 2.3 per cent, was above the provisional figure for the European Union as a whole of 1.2 per cent.