Positive developments on inflation
PRESSURE on the economy has eased slightly with the rate of inflation falling – to the surprise of many analysts who were predicting it would stay at 3%.
Latest figures released by the Office for National Statistics show the CPI rate declined a further 0.2% in May to stand at 2.8%.
The ONS said the largest downward pressures to the change in CPI annual inflation came from motor fuels and food & non-alcoholic beverages. The largest upward pressures to the change in CPI annual inflation came from air and sea transport, where the timing of Easter had a significant impact on the April to May movement. The CPI stands at 122.8 in May 2012.
RPI annual inflation was 3.1% in Ma, down 0.4% from April’s 3.5%. The largest downward pressures to this change came from petrol & oil and food. Partially offsetting these was upward pressure from other travel costs which includes air transport. The RPI stands at 242.4 in May.
Mixed messages were being delivered prior to today’s announcement. Many analysts had predicted thta the fall in inflation since last September’s 5.2% peak would continue to fall as the declining impact of the VAT rise introduced at the start of 2011 continued to be felt. Falling energy, food and commodity prices and a reduction in the price of utility bills was also cited as being likely to have an impact.
However, others said volatile oil prices, which rose in March, and a continuing squeeze on consumer spending were likely to combine to keep the rates as they were.
Nida Ali, economic advisor to the Ernst & Young ITEM Club, said the figures would come as a huge relief to the Monetary Policy Committee.
“Temporary factors that had been keeping inflation elevated for over a year are finally starting to fall out of the calculation,” she said.
“The headline figure is lower than we expected. Although petrol prices, which hadn’t started falling at the time of the April figures, were always expected to exert a significant downward pressure on overall prices, we expected this to be offset by higher air fares which were low last month due to the timing of Easter.
“This data strengthens our conviction that inflation will come back towards the 2% target by the end of the year and sets the scene for further monetary policy easing. In recent speeches, the Governor has already made it clear that the case for implementing more QE has risen and today’s data gives the Bank increased flexibility to put this into effect. We wouldn’t be surprised if the Bank authorised further asset purchases as early as next month.”
