Cheaper food takes inflation below target

Author: By Russell Lynch, Press Association

The Consumer Prices Index (CPI) slid from 2.2 per cent to 1.8 per cent in
June, the Office for National Statistics (ONS) said – the lowest since
September 2007.

Falling food prices in June – particularly for meat, milk and fruit – were the
main factor behind the fall, compared with a year earlier when food costs
were rising sharply.

CPI was also dragged down by a lower increase in furniture prices than seen
last year.

Average petrol costs in June also rose 4.4p to 101.6p a litre, although this
was lower than the 5.3p jump seen a year earlier when oil prices were
heading towards a record 147 dollars a barrel.

Meanwhile, mortgage arrangement fees fell this year compared with rises a year
ago and insurance costs also fell more quickly than 12 months earlier,
despite an upward effect from dearer computer games.

Inflation-watchers on the Bank of England’s Monetary Policy Committee (MPC)
will be relieved that CPI is now below target after an 18-month period in
which rocketing energy bills, food costs and petrol prices pushed the
benchmark to a record 5.2 per cent last September.

But according to its own predictions, CPI is likely to fall below 1 per cent
later this year as the impact of recession weakens demand and prices.

This means Bank Governor Mervyn King is likely to have to write a first letter
to the Chancellor to explain why CPI is undershooting the 2 per cent target.

Today’s figures also showed the wider Retail Prices Index, which includes
housing costs such as mortgage interest payments and council tax, falling to
minus 1.6 per cent. This is the lowest level since ONS records began in 1948.

RPI was affected by the same factors which has dragged the CPI lower in June,
but is negative due to lower mortgage interest payments than a year ago.
Interest rates are currently at a record low of 0.5 per cent, compared with
5 per cent a year earlier.

RPI will fall further until September but after that point will head back
towards positive territory, because of the contrast with emergency rate cuts
which began last October in the wake of the financial crisis. Rate cuts are
unlikely this year, which will add to inflationary effects.

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