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UK inflation rate falls to four-year low in May Breathing space on interest rates after surprise dive in UK inflation
(about 11 hours later)
Lower transport costs and falling food prices helped push the UK's inflation rate to a four-and-a-half-year low at 1.5 per cent in May. Inflation has declined unexpectedly to a four-and-half-year low as the supermarket price war pushes down on the cost of living and eases the pressure on the Bank of England to put up interest rates.
The latest figures mark the sixth consecutive month in which inflation, as measured by Consumer Prices Index (CPI), has come in below the Bank of England's 2 per cent target, according to the Office for National Statistics. Annual consumer price index (CPI) inflation was 1.5 per cent in May, down from 1.8 per cent in April and below economists’ consensus expectation of 1.7 per cent.
"We suspect that 1.5 per cent will mark the low point for consumer price inflation, but it looks well placed to remain below 2 per cent for the rest of 2014, and very possibly beyond, " said Howard Archer, chief UK economist, at IHS Global Insight. The Office for National Statistics reported that the bulk of the fall was a result of lower transport and food and drink costs. Bread, meat vegetable and soft drink prices declined month on month, reflecting the fact that the big four supermarket chains have slashed prices as they come under growing pressure from discounters such as Aldi and Lidl.
Falling transport services costs, notably air fares, provided the largest contribution to the decrease in the rate. Food and non-alcoholic beverages fell by 0.6 per cent year-on- year- the sharpest fall since October 2004- as Britain's supermarkets wage war against discount grocers Lidl and Aldi. “We suggest that the combination of strong sterling, weaker commodity prices and ‘price skirmishes’ by the supermarkets have contributed to falling prices in the shops” Gerard Lane of Shore Capital said.
The rate of inflation, as measured by the Retail Prices Index (RPI), which includes housing costs,  fell to 2.4 per cent in May from 2.5 per cent in April. The Bank’s Governor, Mark Carney, surprised markets last week by suggesting interest rates could rise “sooner than the markets currently expect”, prompting traders to bring forward their forecast for the first rate rise from the first quarter of 2015 to the final quarter of 2014.
Reacting to the figures, Prime Minister David Cameron and George Osborne tweeted May's inflation drop shows the Government's long term economic plan is working, but insisted there is "lots more to do".
Despite the drop in inflation, it remains well above the rate of wage increases, which have fallen to 0.7 per cent. Inflation, which dents consumers' buying power, has stood above pay growth since April 2010, meaning households are yet to benefit from the coalition's much-heralded economic recovery.
Labour's Shadow Treasury Minister Catherine McKinnell said she welcomed the fall in the inflation rate, but insisted that "most people are still feeling the squeeze".
She added: "Wages after inflation have now fallen by over £1,600 a year under David Cameron and the link between the wealth of the nation and family finances is broken."
Good news that inflation down to 1.5%, lowest for 5 years. Another sign that our long term economic plan is working, but lots more to doGood news that inflation down to 1.5%, lowest for 5 years. Another sign that our long term economic plan is working, but lots more to do
Good news that inflation is at its lowest for 5 years - it means more stability and financial security for everyone. #LongTermEconomicPlanGood news that inflation is at its lowest for 5 years - it means more stability and financial security for everyone. #LongTermEconomicPlan
The Treasury added: "Lower inflation and rising job numbers show that the government’s long term plan is working and Britain is coming back. But the job is not done, which is why we must continue to work through that plan." But some City analysts said the latest inflation figure made it less likely that the Bank would need to raise rates from their present record low of  0.5 per cent within the next six months. “It gives the MPC even less cause to worry about a possible rise in inflation expectations and inflation” Jonathan Ashworth of Morgan Stanley said.
The latest figures come days after Bank of England Governor Mark Carney suggested that interest rates are likely to rise sooner than expected, signalling that we could see the first hike before the end of the year. “We expect inflation to stay below target for another  18 plus months and think the MPC will give the recovery more time to build resilience, and pay growth more chance to pick up, before raising rates.”
In a separate development, the ONS showed UK house prices climbed by 9.9 per cent in the year to April to reach a new high of £260,000. London continued to see the strongest growth, with prices jumping by 18.7 per cent to £485,000 on average. Jeremy Cook, of World First, said that “given their central mandate of price stability, there is little cause to alter the current policy as it stands”.
The Bank will release the minutes from its latest Monetary Policy Committee meeting today, which could give an indication of the thoughts of members on the timing of the next rate rise.
The CPI inflation rate has now been below the Bank’s 2 per cent target for six consecutive months. It has not been this low since October 2009. The rate of inflation as measured by the retail prices index (RPI) also declined to 2.4 per cent, down from 2.5 per cent in April.
George Osborne said the fall in the inflation rate was “good news” and “another sign that our long term economic plan is working”. Labour’s shadow Treasury minister Catherine McKinnell also welcomed the fall in the inflation rate, but said that “most people are still feeling the squeeze”.
“Wages after inflation have now fallen by over £1,600 a year under David Cameron and the link between the wealth of the nation and family finances is broken,” she said.
The ONS also reported that house prices continued to surge ahead in April, rising by 9.9 per cent year on year, taking the average house price to a new high of £260,000.
Prices were up 18.7 per cent in London, 6.8 per cent in the South-east and 5.5 per cent in the North-west.
The Bank of England’s Financial Policy Committee met today to discuss whether action to dampen the housing market is warranted.