Inflation tumbles below Bank’s 2% target

Grainne Gilmore

Inflation tumbled below the Bank of England’s 2 per cent target for the first time in nearly 2 years as the recession continues to take its toll on prices.

The Consumer Price Index (CPI) gauge of inflation fell from 2.2 per cent in May to 1.8 per cent in June — the first time it has been under 2 per cent since September 2007, when the credit crisis began to grip the country.

CPI was dragged down by food non-alcoholic drink prices which fell in June but had risen in the same month last year.

Inflation soared to a 16-year high of 5.2 per cent last year as higher oil prices fed through into higher prices for consumer goods. But lower oil costs and falling consumer demand are now putting downward pressure on prices.

Today’s inflation figures, which were in line with expectations, will fuel expectations that interest rates will remain at record lows for months to come, and that the Bank may extend its scheme of quantitative easing next month.

Official figures show that the wider Retail Price Index (RPI) measure, which includes housing costs, tumbled deeper than expected into negative territory to a record low. It fell from -1.1 per cent to -1.6 per cent on the back of steep drops in mortgage costs, the sharpest drop since records began in 1948.

This gauge of inflation is of particular interest to workers as many pay deals are linked to RPI.

The Bank expects CPI inflation to continue falling in the coming months before stabilising at below 1 per cent. As soon as inflation falls below this level, the Bank Governor will be forced to write to the Chancellor to explain why inflation has veered by more than 1 per cent from the Bank’s target. He has already written three letters to explain why inflation rose above 3 per cent.

Food price inflation eased sharply during June, with the biggest downward pressure coming from meat, bread and cereals, fruit, vegetables and milk, and cheese and eggs. There was also a smaller downward effect from sugar, jam and confectionery.

A significant downward effect also came from furniture prices, which rose by less than last year.

But the rising cost of computer games acted as an upward pressure on inflation, the Office for National Statistics said. (Grainne Gilmore, The Times) http://business.timesonline.co.uk/tol/business/economics/article6705952.ece

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