UK Inflation Continues to Slowdown

In May the UK annual inflation slowed again as the Consumer Prices Index (CPI) fell to 2.2% from 2.3% in April, according to The National Office of Statistics (ONS).

The decline was less than expected and means we are still above the Bank of England's target of 2%. However, the annual inflation reading was the lowest since January 2008 sparking fears over deflation.

In addition the Retail Prices Index (RPI), which includes household costs and mortgage interest payments moved to -1.1% from -1.2%. This was due to a slight rise in average mortgage interest payments.

The RPI rate is often used by companies as the starting point for wage negotiations.

Inflation downward pressures
The largest downward pressure affecting the change in the CPI annual rate was from non-alcoholic beverages and food. This was principally due to the price of meat rising by less than a year ago. There were smaller downward effects from other staple foods like vegetables, bread, cereals, milk, cheese and eggs.

A large downward pressure also came from housing and household services including electricity bills where tariffs fell this year but were unchanged a year ago.

Inflation upward pressures
The largest upward pressure 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.

The effects of last year's budget were mainly seen in April. A further large upward pressure came from as increase in the price of DVD's and TVs which had fallen the year before.

Concerns over deflation
As inflation continues to fall there are bound to be concerns about whether the economy is going to drop into a period of deflation, which could seriously reduce demand and business investment.

Certainly these results show that the recovery may not be as close as we would like and that businesses could still be in for a hard time over the coming months as inflation is expected to fall again.

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This Business News Archive article was created on 16th June 2009