MercoPress. South Atlantic News Agency

UK inflation drops to 2.8% in May pushed by lower fuel and food prices

BoE could be considering a “shot” of liquidity to boost the economy, say experts

UK rate of inflation fell last month to a two-and-a-half year low owing to slowing fuel and food prices. The Consumer Prices Index (CPI) measure fell to 2.8% in May from 3% in April, the Office for National Statistics (ONS) said.

The Retail Prices Index (RPI) measure fell to 3.1% from 3.5% in April. Inflation has fallen from 5.2% last September due to the waning impact of the VAT rise in 2011 and falling energy, food and commodity prices.

The fall in inflation was unexpected as the consensus among economists was that the rate would be unchanged in May. However, analysts said price rises were likely to slow further in the coming months.

“Expect further falls in inflation as energy bills rise less over the summer versus last year,” said George Buckley at Deutsche Bank.

”The fall in CPI inflation to 2.8% in May increases the likelihood at the margin of more quantitative easing (QE)... We expect £50bn with a sizable risk of a 25 basis point rate cut to boot.“

The current level of QE, a mechanism to pump money into the economy to try and stimulate growth, stands at £325bn and was last increased by the Bank's Monetary Policy Committee in February.

The May inflation figures show that consumers are starting to benefit from a fall in recent months in the cost of crude oil.

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.

The Bank of England has predicted that CPI inflation will remain above the 2% target rate ”for the next year or so“.

Last month, inflation moved to within 1% of the target, meaning Bank of England Governor Sir Mervyn King did not have to send an open letter of explanation to the Chancellor, George Osborne.

An open letter is triggered if the CPI rate remains above 3% or below 1% for three months in a row.

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.

The most significant upward pressure on inflation, the ONS said, 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% in May, compared with an 11.1% drop last year, while sea fares rose 2.6%, compared with a 14.7% fall last year. (BBC).-