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Inflation falls to four-year low as more QE likely

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  • 17/06/2020
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The UK inflation rate fell to 0.5 per cent in May – the lowest rate for four years – as consumption ground to a halt amid the coronavirus lockdown.

 

The Consumer Prices Index (CPI) fell to 0.5 per cent from 0.8 per cent recorded in April, its lowest level since June 2016, according to the Office for National Statistics (ONS).

The rate was last lower at 0.3 per cent, in May 2016.

Reduced household utility bills and falling fuel prices were the main contributors to the lower inflation rate but this was partially offset by rising food and non-alcoholic drink prices.

The ONS noted the upward tick was influenced by packs of individual cakes, dried potted snacks, cheese spread, blueberries, packets of peanuts, premium potato crisps, bags of chocolate sweets, instant coffee and orange juice.

The transport, recreation and leisure, and hotel accommodation sectors also pulled down the figure as lockdown was firmly in place in May.

And health prices fell 1.4 per cent compared with a 0.2 per cent rise a year ago as the cost of painkillers, antihistamine tablets and contact lenses came down.

The ONS also identified 74 basket items that were unavailable to consumers in May, though this figure was down from the 90 unavailable items in April.

 

‘Inflation will likely spend the next few years far below two per cent’

Laura Suter, personal finance analyst at AJ Bell, said consumption practically ground to a halt in May, with another drop in inflation an “inevitable consequence” of lockdown and a stark contrast to the two per cent inflation seen this time last year.

Paul Dales, chief UK economist at Capital Economics, said fuel price inflation will start to have an upward influence on overall inflation from June as oil prices rebound, along with the price inflation for food and alcohol.

Dales added that the fall in inflation will likely prompt the Bank of England to announce further quantitative easing (QE).

He said: “It is true that measures of broad money are already soaring. But they are unlikely to boost inflation when demand is so depressed.

“And even when the economy recovers, we suspect that low wage growth will mean that inflation is more likely to spend the next few years too far below the two per cent target rather than too far above. That’s why we suspect that an expansion of QE by the Bank of England tomorrow won’t be the last.”

 

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