Inflation set to hit 20-month low

Coins and notesCost of living figures are to provide further evidence that the consumer spending squeeze is loosening its grip as the rate of inflation falls to a 20-month low.

The consumer prices index (CPI) rate of inflation is forecast to fall to 3.1% in April - its lowest rate since September 2010 - from 3.5% in March after oil prices softened.
However, a 3.1% rate of inflation would still force a letter of explanation from Bank of England Governor Sir Mervyn King to the Chancellor, explaining why it remains more than one percentage point above the Government's 2% target.

Howard Archer, chief UK and European economist at IHS Global Insight, warned: "The fact remains that consumer price inflation is proving a lot stickier than had been expected and hoped for."

A further drop in inflation will bolster the case for the Bank to pump more emergency cash into the UK, after it fell into recession in the first quarter of the year.

Inflation has fallen from 5.6% last September due to the waning impact of the VAT hike at the start of 2011, falling energy, food and commodity prices and a number of bill cuts from utility providers in February.

However, oil prices rose in March amid fears over increasing tensions between the West and Iran, with Brent crude in London hitting 128 US dollars a barrel, pushing up petrol pump prices as well as having an impact on food bills. Oil prices have since fallen from their March highs, and in contrast rose significantly in April 2011, which will help the year-on-year comparison.

There should be further downward pressure in April from lower utility bills, after SSE cut tariffs, although there will be some resistance from higher excise duty on cigarettes and alcohol, as well as increased water bills.

Earlier this month, the British Retail Consortium's shop price index also recorded a fall in the annual rate of food price inflation to 4.3% in April from 5.4% in March. Households were squeezed by high prices and sluggish wage growth throughout 2011 and economists warned this pressure could be maintained if oil prices remain elevated.

The retail price index, an alternative measure of inflation, is forecast to dip slightly 3.6% to 3.5%.

More stories

Read Full Story