UK inflation rate falls to 4.2 per cent last month

News Article - 11 July 2011
Category: Business

UK markets were left puzzled after experiencing an unexpected fall in inflation from 4.5 per cent to 4.2 last month, according to the Consumer Prices Index (CPI) measure.

Additionally, the Retail Prices Index (RPI) - which includes mortgage interest payments - also dropped from 5.2 per cent to 5 per cent.

Perhaps surprisingly, the decline in inflation has been attributed to the falling prices of games, toys and hobbies, as well as clothing and footwear.

Clothing prices fell 1.9 per cent compared to the previous month, largely because of the earlier-than-usual summer sales for women's outerwear and footwear.

Despite the drop in inflation, food costs continue to rise sharply, with a 0.9 per cent increase in the last month - including notable price increases for staple foods such as bread, milk, cheese and eggs.

The CPI rate has overshot the Bank of England's 2 per cent inflation target for 35 of the last 41 months and many experts see little evidence of this changing.

However, Howard Archer, economist at HIS Global Insight, believes the drop in consumer price inflation last month could help keep interest rates low in the short term.

"The retreat in consumer price inflation in June boosts the case for the Bank of England to hold fire on interest rates for many more months to come to give the fragile, faltering economy every chance to develop growth momentum," he said.

Economists also predict that the positive June data will improve the possibility of the Bank increasing its "quantitative easing" programme, which includes buying up Government debt in order to improve the cash flow of the economy, if the recovery should falter.

But experts also warn that despite the fall in inflation last month, rates are yet to peak, with a rise to 5 per cent still widely expected due to an increase in energy bills and commodity prices.

Indeed a 20 per cent rise in household energy bills is only likely to influence inflation data until August.

Article keywords: Inflation rate, Consumer Prices Index, CPI, Retail Prices Index, RPI, Bank of England, Howard Archer, HIS Global Insight, quantitative easing, Government debt, energy bills, commodity prices

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