Tuesday, 15 Jun 2010 10:59
Food prices drove inflation lower
By Sarah Garrod.
Official figures released this morning have shown UK inflation fell month-on-month from 3.7 per cent in April to 3.4 per cent in May.
The Office for National Statistics (ONS) figures showed that consumer price index inflation (CPI) fell faster than analysts had expected, with lower food costs helping to drive inflation down.
However the figures remain well ahead of the Bank of England's inflation target of two per cent.
As well as lower food prices, petrol, alcohol and tobacco prices did not rise as quickly as expected, helping to push the CPI lower.
The retail prices index meanwhile rose by 5.1 per cent in May from 5.4 per cent.
Howard Archer, chief UK and European economist at IHS Global Insight said following release of the ONS results: "At last some reasonably decent news on the inflation front for the Bank of England as consumer price inflation fell back slightly more expected to 3.4 per cent in May from a 17-month high of 3.7 per cent in April.
"While this is still substantially above target, inflation is at least heading down and the May data break a recent series of nasty upward shocks."
Mr Archer added that while inflation may continue to fall, tax rises in next week's emergency Budget could have an effect on the CPI. He said: "However, if, as seems likely, VAT is increased from 17.5 per cent to 20 per cent - either at next week's emergency budget or sometime over the coming months - as part of the government's measures to rein in the public finances, this will have a temporary upward impact on inflation."
Meanwhile, Travelex has warned of how the news could affect the pound. The firm said "sterling has come under pressure this morning" following the figures, seeing the pound fall 0.13 per cent against the euro to 1.2057 and 0.32 per cent against the dollar to $1.4697.
Mark Bolsom, head of the UK trading desk at Travelex Global Business Payments, said: "On one hand, the Bank of England will be pleased because they have always said the rise in inflation was temporary. Doubtless the pound's better performance against the euro will have helped because we import heavily from Europe. It is too early to tell whether this is the start of a downward trend in inflation.
"On the other hand, it will concern investors that whilst inflation has eased, the Bank has done nothing to influence this. The Bank will not raise interest rates whilst Britain faces a period of extensive fiscal tightening and we remain vulnerable to a rise in inflation. If commodity prices rise, sterling drops back against the euro and food inflation rises, inflation will go up again."