Inflation tumbles amid price war

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The supermarket price war drove food and drink costs to their first fall since 2006 last month as inflation dipped to a four-and-a-half-year low, official figures showed today.

The Consumer Prices Index (CPI) measure of inflation dropped more steeply than expected to 1.5% in May - the lowest level since October 2009 - from 1.8% in April.

Shoppers experienced a year-on-year decline of 0.6% in food and non-alcoholic drinks prices, the first for more than eight years and the heaviest since October 2004.

It came amid a sustained push by the major supermarkets Tesco, Asda, Sainsbury's and Morrisons to combat the threat of discounters Aldi and Lidl which have been gnawing at their market shares.

The CPI figures mark the sixth month in a row when the rate has been at or below the Bank of England's 2% target, the first time this has happened since 2009.

Prime Minister David Cameron tweeted: "Good news that inflation is at its lowest for 5 years - it means more stability and financial security for everyone."

But Labour and the unions pointed to the fact that households were still being squeezed with most recent data showing wage growth had slowed to 0.7%

Today's inflation figures from the Office for National Statistics (ONS) showed air fares, lower due to the timing of Easter, had a significant downward effect on CPI while petrol pulled in the other direction as pump prices crept up.

The falling price of groceries was driven by month-on-month decreases for staples such as bread and cereals (1.6%), meat (1%), vegetables (2.6%) and soft drinks (1.3%).

However, wine lovers may have noticed little improvement in the cost of their weekly shop as the price of a bottle was up 4% on the month. Computer game fans were also shelling out more.

Meanwhile, lower womenswear prices saw clothing and footwear record negative year-on-year inflation for the first time since April last year.

The fall in CPI inflation sees it resume a downward trend that began last summer, following a rise to 1.8% in April.

Chancellor George Osborne said in a Twitter message: "Another sign that our long term economic plan is working, but lots more to do."

But shadow Treasury minister Catherine McKinnell MP said: "The fall in the rate of inflation is welcome, yet most people are still feeling the squeeze."

TUC general secretary Frances O'Grady said: "Inflation may have fallen slightly but prices continue to rise faster than wages. Living standards are still on the slide which means that for many families the recovery is far from a reality."

The figures initially saw the pound fall against the US dollar as they dented expectations that interest rates may rise as early as this year, but it was later flat.

Continued low inflation appears to ease any pressure on the Bank of England to raise rates but last week governor Mark Carney signalled that the first hike after more than five years at 0.5% could come sooner than expected.

Policy makers must consider inflationary pressures that could be building up down the track as the recovery continues to make strides - as separate ONS figures showed house prices up 9.9%, their highest annual increase in nearly four years.

Ian Stewart, chief economist at Deloitte, said: "The UK is experiencing low inflation and strong growth, the holy grail for economic policymakers.

"Inflation has almost halved from last year's peak and growth expectations for this year have almost doubled. We are in the sweet spot of the economic cycle."

Samuel Tombs, UK economist at Capital Economics, said producer price indicators, the strength of the pound making imports cheaper, and political pressure on energy bills were likely to see inflation ease further to as low as 1% by the end of the year.

He said: "Against this low inflation backdrop, we believe the MPC [Monetary Policy Committee] is likely to tread cautiously and raise interest rates only very gradually over the coming years."

Martin Beck, senior economic advisor to the EY ITEM Club, said: "Looking forward, inflation is likely to remain below the MPC's 2% target for some months to come.

"While the recent rise in oil prices, linked to the troubles in Iraq, is one blot on the landscape, any pressure on firms to raise prices as a result of higher wage demands still remains noticeable by its absence."

David Kern, chief economist at the British Chambers of Commerce, said: "The continued fall in inflation below the 2% target is good news for businesses and consumers, and supports our calls for the MPC to avoid jumping the gun on interest rate rises."

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