UK inflation sinks to four-year low as coronavirus puts pressure on prices
UK inflation fell to a four-year low in May, driven by falling fuel costs and cuts to clothing prices as coronavirus sucked demand from the global economy.
The Consumer Price Index (CPI) dropped to 0.5 per cent last month, the Office for National Statistics (ONS) said, falling from 0.8 per cent in April.
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The ONS said the main drivers behind the fall were a slump in fuel prices, with the cost of petrol falling to a four-year low compared to a jump in price in 2019.
Clothing and footwear prices also sank three per cent compared to a year earlier — the biggest drop since 2010 — as retailers launched sales to offload stock.
Bank of England expected to expand quantitative easing
UK inflation is well below the Bank of England’s two per cent target and the central bank’s Monetary Policy Committee (MPC) decision, which will be announced tomorrow, is expected to include some ramping up of its quantitative easing programme to help boost the economy.
Economists polled by Reuters are expecting the BoE to announce an extra £100bn of bond purchases tomorrow, following on from the £200bn of bond purchases it started in March.
“Inflation is not something that is going to worry the Bank for some time, it will be more concerned about growth,” said Neil Birrell, chief investment officer at Premier Miton.
“Even though the long term impact of government and BoE policy might be inflationary, there will be no signs of it in the current environment”.
Britain suffered a record fall in economic output in April, when the economy shrank by more than 20 per cent due to the closure of non-essential businesses to the public to slow the spread of Covid-19.
Last month the BoE said lower oil prices, as well as a regulatory cap on household energy and water bills, were likely to keep inflation below one per cent for several months.
Oil price falls drag UK inflation lower
“The cost of games and toys fell back from last month’s rises, while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months,” said said ONS deputy national statistician Jonathan Athow.
“Outside these areas, we are seeing few significant changes to the prices in the shops,” Athow said.
The coronavirus lockdown also hampered the ONS’ efforts to collect prices, with 74 items from the UK’s inflation basket – 14 per cent of the total — currently unavailable.
Today’s ONS release also showed that the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rate was 0.7 per cent in May, down from 0.9 per cent the month before.
Falling recreation and culture prices helped pull the reading further down. However rising prices for food and non-alcoholic beverages partially offset these downward pressures.
Core inflation — which excludes typically volatile energy, food, alcohol and tobacco prices — showed less of a decline, falling to 1.2 per cent from April’s 1.4 per cent. Economists had forecast a small drop to 1.3 per cent.
“We expect CPI inflation to hover close to zero throughout the second half of this year, provided oil prices don’t surge,” said Pantheon Macroeconomics’ Samuel Tombs.
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“A period of deflation would result if the government cut VAT to pep up the recovery, though we expect it to pull other fiscal levers instead.”
“The outlook for extremely low inflation, then, fully justifies the MPC announcing more quantitative easing at tomorrow’s meeting,” Tombs continued.