A broader measure of inflation using the retail prices index recorded the sharpest drop in the cost of living since 1948
Britain’s inflation rate dipped below the government’s 2% target for the first time in almost two years last month as cheaper food and soft drinks helped keep the cost of living in check, according to official figures released today.
Data from the Office for National Statistics showed inflation as measured by the consumer price index (CPI) fell from 2.2% in May to 1.8% in June.
A broader measure of inflation using the retail prices index recorded the sharpest drop in the cost of living since 1948. Prices were 1.6% lower last month than they were in June 2008.
Higher oil prices and more expensive imports caused by last year’s weakness in sterling has meant inflation in recent months has been higher than City expectations.
Today’s figures suggest, however, that the effects of Britain’s recession-hit economy are causing inflationary pressures to ease and will allow the Bank of England to persist with its twin strategy of ultra-low interest rates and boosting the money supply through quantitative easing.
Before June, consumer price inflation had been above the central bank’s 2% target since October 2007, peaking at 5.2% last September.
The biggest downward effect on the annual CPI rate came from food and non-alcoholic drink prices, which fell last month but rose in the same month last year.
Meat, bread, fruit, vegetables and dairy products all contributed. There was also downward pressure from furniture prices, which rose less than last year.
One upward pressure on the index came from the price of computer games, which rose by more than a year ago.
Analysts believe that inflation will continue to slow in the coming months.
“Much of the fall in RPI inflation reflects weaker mortgage payments, house prices and lower oil prices; all of these are excluded from core CPI inflation, which has been less volatile. But even core CPI inflation should wane over the next six months as the margin of spare capacity in the economy exerts greater downward pressure on underlying pricing pressures,” said Colin Ellis, European economist at Daiwa Securities.
Philip Shaw, chief economist at Investec, said he expected that CPI would have fallen to 1% by this autumn.
The newest member of the Bank’s monetary policy committee, Professor Adam Posen, told MPs that he was more concerned about undershooting the 2% inflation target than overshooting it.
“While the 2% target is right, if you overshoot a little one month here or one month there, it doesn’t necessarily mean you get an inflationary cycle,” Posen told the Treasury select committee during his appointment hearing.
“What Japan has demonstrated is that once you fall into a deflationary situation, it’s very hard to get out,” he added.
