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Inflation falls after drop in petrol prices and airfares Inflation falls after drop in petrol prices and airfares
(about 4 hours later)
Falling petrol prices pushed down UK inflation more than expected last month, bringing some relief to both households and Bank of England policymakers. Falling petrol prices pushed down UK inflation more than expected last month, giving the Bank of England's incoming governor Mark Carney more room to step in and shore up the economy should the recovery falter.
The consumer prices measure of inflation fell for the first time since last autumn and stood at 2.4% in April, down from 2.8% in March. The drop was driven by lower fuel costs and airfares as the oil price fell, more than offsetting a rise in food prices after damage to crops over the long winter, the Office for National Statistics (ONS) said. But there were warnings that slowing inflation would bring little respite to stretched households with prices still rising three times faster than average pay and food price inflation hitting a 13-month high.
Economists had forecast on average a rate of 2.6% for April and said the softer outcome would give incoming Bank of England governor Mark Carney more room to step in and shore up the recovery should growth falter. But many warned inflation could push higher again in coming months, which would intensify pressure on household budgets already stretched by meagre pay growth. It was the first drop in the consumer prices measure of inflation (CPI) since last autumn, down to 2.4% in April from 2.8% in March. The softening was driven by lower fuel costs and airfares as the oil price fell, the Office for National Statistics (ONS) said.
"Any easing back in inflation is welcome news for recovery prospects as it lifts consumers' purchasing power and gives the Bank of England more room for manoeuvre on monetary policy. Even so, consumer price inflation of 2.4% in April is still putting an appreciable squeeze on households' purchasing power given that average weekly earnings actually fell 0.7% year-on-year in March and were up a mere 0.4% year-on-year in the three months to March," said Howard Archer, economist at IHS Global Insight. The only real upward effect on the headline inflation number was a rise in food prices after damage to crops over the long winter. Food prices were up 4.6% on a year ago and within that vegetable price inflation was at a four-year high of 9.9%.
Inflation has been above the Bank's government-set target of 2% for more than three years and rose as high as 5.2% in autumn 2011. Tuesday's data show the first drop in the rate since last September but economists and the BoE predict it will tick higher again over the summer, partly as the downward effect of a period of falling fuel prices comes to an end. Between March and April this year, petrol and diesel prices both fell by 2.1p and 3.9p a litre respectively compared with rises of 3.2p and 2.1p a year earlier. Economists had forecast CPI to come in at 2.6% for April and said the softer outcome would ease some of the immediate pressure on Canadian central banker Carney when he takes the helm at the BoE in July. But most predicted inflation would pick up again over the summer.
Samuel Tombs at Capital Economics explained: "Inflation still looks set to climb again in the coming months as we reach the anniversary of a period of falling petrol prices and deep discounting on the high street. However, the peak, probably in June, could now be closer to 3% than the 3.5% we had expected beforehand. What's more, underlying price pressures still look subdued." "The bottom line is this is not the start of a collapse. A lot of the fall is temporary. However, it probably does spare Mark Carney the bother of writing to the chancellor to explain why inflation is above 3% within his first month in office," said Alan Clarke at Scotiabank in London.
The ONS said core inflation, which strips out the erratic components of food and energy, fell to 2%, the softest since autumn 2009. The retail prices index, which includes mortgage payments, fell from 3.3% to 2.9%. Inflation has been above the Bank's government-set target of 2% for more than three years and rose as high as 5.2% in autumn 2011. Tuesday's data showed the first drop in the rate since last September but economists and the BoE predict it will tick higher again, partly as the downward effect of a period of falling fuel prices comes to an end. Between March and April this year, petrol and diesel prices both fell by 2.1p and 3.9p a litre respectively compared with rises of 3.2p and 2.1p a year earlier.
Separate ONS data also showed factory gate inflation, which measures prices charged by producers, was the slowest since autumn 2009. Samuel Tombs at Capital Economics said: "Inflation still looks set to climb again in the coming months as we reach the anniversary of a period of falling petrol prices and deep discounting on the high street. However, the peak, probably in June, could now be closer to 3% than the 3.5% we had expected beforehand. What's more, underlying price pressures still look subdued."
The ONS said core inflation, which strips out the erratic components of food and energy, fell to 2%, the lowest rate since autumn 2009. The retail prices index, which includes mortgage payments, fell from 3.3% to 2.9%. Separate ONS data showed factory gate inflation, which measures prices charged by producers, was the slowest since autumn 2009.
The government welcomed the drop in headline inflation. "This is good news for families and businesses. Inflation is down by more than a half from its peak," the Treasury said in a statement.
But critics of the government's austerity drive noted price rises were still outstripping average pay growth of 0.8%, leaving many households struggling to cover basic costs such as food and energy bills.Labour's shadow treasury minister Cathy Jamieson commented: "On top of stagnant wages, rising food prices and soaring energy bills, the average family is £891 worse off this year because of tax and benefit changes since 2010."
The TUC calculates that workers are £43 a week worse off in real terms compared with three years ago. TUC general secretary Frances O'Grady said: "Average pay packets have fallen by nearly 10% over the last three years – eroding the spending power of households and eating away at the value of savings for those families still fortunate enough to have them.
"Unless we start to see real wages increase, consumer spending will remain weak and the economy will continue to struggle."