Economy: CPI inflation falls to its lowest in more than four years
09:49 17 June 2014
Inflation fell sharply to a four-and-a-half-year low in May as supermarket price wars pushed food and drink costs to their steepest decline in nearly a decade.
The Consumer Prices Index (CPI) measure of inflation dropped more heavily than expected to 1.5%, from 1.8% the month before, the Office for National Statistics (ONS) said.
CPI now equals the rate seen in October 2009 and was last lower, at 1.1%, in September 2009.
The latest figures mark the sixth month in a row when the rate has been at or below the Bank of England’s 2% target, the first time this has happened since 2009.
Air fares, which were lower due to the timing of Easter, had a significant downward effect, while petrol pulled in the other direction as pump prices crept up.
Food and non-alcoholic beverages fell by 0.6% year on year, the sharpest fall since October 2004. The last time there was a decline was in March 2006.
Supermarket staples such as bread and cereals, meat, vegetables and soft drinks led the drop.
Tesco, Asda, Sainsbury’s and Morrisons have been battling on price as they face an increasing threat from discounters Aldi and Lidl gnawing at their market share.
Meanwhile, lower womenswear prices saw clothing and footwear record negative inflation for the first time since April last year.
Despite the drop in inflation, it remains well above the rate of wage increases, which have fallen to 0.7%, meaning real-terms pay is still stalling.
A separate measure of inflation, the Retail Prices Index (RPI) which includes housing costs, fell to 2.4% from 2.5% the month before.
Samuel Tombs, UK economist at Capital Economics, said the latest CPI figure suggested the Bank of England’s Monetary Policy Committee (MPC) would act cautiously in raising interest rates.
“May’s drop in UK consumer price inflation demonstrates that strong growth in economic activity is not prompting underlying price pressures to build.
“The fall in CPI inflation to 1.5% was larger than the consensus estimate (1.7%) and left inflation at its lowest level since late-2009. May’s figure also confirms that the pick-up to 1.8% in April was entirely due to the later timing of Easter this year.
“Looking ahead, it continues to look likely that CPI inflation will ease further, perhaps to as low as 1% by the end of the year. For a start, sterling’s further appreciation points to a continued easing of core goods inflation over the rest of this year. So too does the recent weakness of producer output price inflation, which separate figures today show was just 0.5% year-on-year in May.
“Meanwhile, a combination of political pressure and recent sharp falls in wholesale prices should ensure that any rises in consumer energy bills later this year are much smaller than seen last winter. And while these downward influences on inflation will be temporary, we still believe there is considerable scope for productivity growth to pick up, keeping inflation low over the medium term.
“Against this low inflation backdrop, we believe the MPC is likely to tread cautiously and raise interest rates only very gradually over the coming years.”