National: Surprise as inflation falls to two-and-a-half year low

THE rate of inflation unexpectedly fell to a two-and-a-half-year low last month as declining oil prices started to filter through to the petrol pumps.

The Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, from 3% in April, the Office for National Statistics (ONS) said, the lowest level since November 2009. City analysts had expected the rate to remain unchanged.

The decline was driven by a sharp drop in petrol pump prices, as the average petrol price fell by 4.5p per litre between April and May to stand at 137.1p. Last year, the average petrol price rose 2p to 136.3p.

Inflation has fallen from 5.2% last September due to the waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices, easing pressure on squeezed household incomes.

Despite today’s fall, inflation has still not pulled back as quickly as the Bank of England initially expected, after fears over increasing tensions between the West and Iran pushed oil prices higher in March.

But the cost of crude oil has fallen since then and May’s inflation figures show that this is starting to benefit consumers.

Average diesel prices also decreased, dropping 4.4p to 143.3p between April and May, compared with a 0.7p rise last year to 141.5p.

Most Read

The fall in inflation in May is likely to bolster the case for the Bank to pump more emergency cash into the economy through its quantitative easing programme, as the eurozone crisis escalates and threatens to destabilise the UK economy.

Britain’s economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2%, following a 0.3% drop in the final quarter of 2011.

Last month, inflation moved to within 1% of the Government’s 2% target, meaning Bank Governor Sir Mervyn King did not have to send a letter of explanation to the Chancellor.

A Treasury spokesman said: “Inflation is out of Open Letter territory for the second month in a row, which is good news and is providing some welcome relief for family budgets.”

In further evidence that the weak economic climate is forcing retailers to cut prices to draw in customers, food and drink prices rose by just 0.3%, compared with a much steeper 1.3% rise last year.

The ONS said this was driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell.

Elsewhere, the ONS said the cost of recreation and culture also had a downward effect on overall prices, driven by games, toys and hobbies and photographic equipment.

The most significant upward contribution came from air and sea fares, but these were distorted by the timing of Easter in 2011 and 2012 and the subsequent difference in the timing of school holidays.

Air fares rose 1.4% this year, compared with an 11.1% drop last year, while sea fares rose 2.6%, compared with a 14.7% fall last year.

Alternative measures of inflation also fell, as the Retail Price Index fell to 3.1% in May, from 3.5% in April.