MercoPress. South Atlantic News Agency

UK inflation slows to 2.5% in May but still above target

United Kingdom's rate of inflation slowed in May to 2.5%, the weakest level in seven months, according to figures from the Statistics Office. Inflation in April was 2.8%.

But analysts still expect the Bank of England to hike interest rates later this year to ensure that inflation falls to 2%, the government's target. Inflation has now been above the government's target for 13 months. Falling prices for gas and electricity, compared with the rises one year ago, was the main reason for the reduction in inflation. Lower food prices, particularly for vegetables and meat, also helped to keep inflation in check. However, food prices are still rising at 5%, twice the inflation rate and the cost of air travel rose sharply compared with falls in the same month a year ago. The core inflation rate, which excludes food, alcohol, tobacco and energy, was up to 1.9%, compared with 1.8% in April. On Monday, Bank of England governor Mervyn King warned people to expect higher interest rates by the end of the year unless consumers and companies slow spending. Mr King told the Welsh CBI that the Bank's Monetary Policy Committee was still concerned that spending was rising faster than the economy's ability to cope with the higher demand, and said that "more persistent inflationary pressures have picked up". He also warned borrowers, especially those contemplating house purchases that "it would be unwise to borrow so much that the repayments are affordable only if interest rates remain at their existing levels". Despite four interest rates rises since August last year, there are still mixed signals as to whether house prices are falling across the UK. Forward-looking financial markets in the UK are expecting base rates to reach 6% by the end of 2007.