UK CPI inflation falls to 2.8 per cent

Tuesday, 19 June 2012 02:17

Inflation in the UK has fallen to 2.8 per cent in May, down from 3.0 per cent in April. helped by cheaper petrol prices due to a fall in the wholesale price of oil. This is the lowest level of inflation in the UK for two and a half years.

The fall in inflation since the peak of September 2011 when inflation was at 5.2 per cent could pave the way for a resumption of the Bank of England's quantitative easing (QE) asset purchase programme.

The QE programme currently stands at £325 billion and was last added to in February of this year. At The Mansion House speech last week, the Governor of the Bank of England, Sir Mervyn King hinted that a resumption in QE was on the cards.

Howard Archer, Chief UK & European Economist at IHS Global Insight said: "Sir Mervyn King indicated in his Mansion House speech last Thursday that the case for more QE had grown in the light of recent weakened news on the UK economy and a deteriorating outlook, and May’s further retreat in inflation makes it easier for the Bank of England to act."

Oil prices fell by their largest amount since late 2008 in May. This means UK consumers have seen the price they pay ay the forecourts drop by nearly 4p a litre in each of the past two months. Other contributions to the fall in inflation came from lower prices for food and drink.

The retail prices index (RPI) which includes the cost of mortgages and rent, fell to 3.1 per cent, down from 3.5 per cent in April

Analysts expect to see the CPI stay at around three per cent in the next few months as a result of the continuing impact of the sharp rise in oil prices seen at the beginning of 2012 and future changes in oil prices are likely to be a key factor in determining the future direction of inflation.

Low wage increases, which have been a feature of the UK economy for the past three years and are set to continue, are expected to contribute to the lower level of inflation during the remainder of 2012.

If inflation stays at around three per cent for the rest of the year, it will make the Bank of England’s job of justifying any planned extension of the QE programme easier to the wider public.

Howard Archer, from forecasters HIS Global Insight said: "Consumer price inflation should head down further over the coming months, although it may hover around 2.8% in the near term due to the lingering impact of the sharp rise in oil prices at the start of the year. we expect consumer price inflation to be down to around 2.2% by the end of 2012 and to dip below 2.0% in 2013."

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