The Consumer Prices Index plummeted to just 1.5% in May this year compared to 1.8% in April, surpassing previous forecasts made by economists that estimated that the drop would be to around 1.7%.
And the news will be welcomed by the Bank of England who have now witnessed six consecutive months in which they have been able to keep the country’s inflation rate below their official target of 2%.
The primary factors that have been forwarded by economists for the sharp fall are the recent plunge in flight fares offered to consumers across the country and a similar drop in food prices during the month of May.
The ONS identified that the price of food and non-alcoholic drinks dropped by 0.6% in the 12 months to May 2014, representing the steepest decline in over ten years.
And compellingly it was the fall in inflation in the costs of day-to-day basics like bread, cereals and vegetables which were highlighted as the major contributors toward the fall in inflation to 1.5%.
This view was shared by Alan Clarke, economist at Scotiabank, who argued:”In particular, Morrison’s cut the price of 1,200 goods by an average of 17% and Tesco slashed a variety of food prices”.
The downward trend of inflation as measured by the Consumer Prices Index was mirrored by the Retail Prices Index, where the latest figures revealed that inflation fell to 2.4% last month compared to 2.5% in April.
Cost of living crisis continues
Nevertheless, problems remain for the country’s lowest earners despite the recent fall in inflation as the ONS revealed that wage growth has continued to be outstripped by the cost of living in the UK.
Whilst inflation may have fallen to 1.5% in May, the average growth in wages across the UK during the same period was just 0.7%, clearly representing the reasons why so many household’s are acquiring such high levels of debt and are clouded by financial uncertainty at present.
Moreover, the ONS have argued that the sharp fall between May and April was somewhat predictable considering that Easter fell in the latter this year, which subsequently resulted in the majority of travel companies raising their costs in order to capitalise on the typical Easter rise in demand.
This would suggest that the actual importance of the fall in inflation is insignificant, because it simply reflects a reversal of the typical upward inflation trend that occurs during the Easter period.
And the data will likely be utilised by critics of the government to highlight the continuation of the ongoing ‘cost of living crisis’ in the country, which has seen the actual value of worker wages essentially diminish due to the inflation rate in the country exceeding wage growth for over four years.
This trend was temporarily halted back in March, though policymakers will fully aware of the return to this pattern since and will likely proceed with caution when implementing new policies which affect those with middle or low incomes or have high levels of debt at present.
Jeremy Cook, chief economist at the currency company, World First, has argued that the higher-than-forecasted fall in inflation has meant that the Bank will be under no real pressure to raise rates anytime soon, despite Governor Mark Carney’s warning last week that rates could rise as early as this year.
“There is pressure on Mark Carney and the rest of the MPC to hike rates on the back of growth and housing market concerns, but given their central mandate of price stability, there is little cause to alter the current policy as it stands,” he said.
Howard Archer, chief UK and European Economist at IHS Global Insight, forecasted that inflation would continue to stay below the Bank’s target of 2% for at least the rest of the year, even suggesting that it could go ‘well beyond then as well’.
“This is very good news for consumers’ purchasing power and it also affords the Bank of England flexibility, as it toys with the idea of raising interest rates before the end of 2014,” he added.
In particular, those with large mortgages or high levels of unsecured debt will need to be considered before the Bank of England considers raising their
Separate data released by the ONS also illustrated that property prices in the UK surged by 9.9% on average in the year to April 2014, taking the estimated average house price to a record high of £260,000.
And despite Carney’s warnings, he will be fully aware that an interest rate at the wrong time could be potentially fatal to those with high levels of debt but a low income at present, and it is imperative that he continues his reactionary stance toward policymaking in order to ensure that the financial future of all in the UK remains stable and secure.Source; MoneyExpert