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Inflation falls to four-year low

Paloma Kubiak
Written By:
Paloma Kubiak

The UK inflation rate fell to 0.5% 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% from 0.8% 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%, 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% compared with a 0.2% 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.

‘We’re all having to eat and drink every meal at home’

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 2% inflation seen this time last year.

Suter said: “A further fall in petrol and diesel prices in May means that transport costs reduced as prices at the pump dropped. This was despite a rebound in oil prices during the month, but as most forecourts remained empty due to people not using their cars during lockdown, fuel prices didn’t rise.

“We appear to have stopped stockpiling toys and games to entertain children during lockdown, as the price of these goods dropped in the month after a rise in April – which helped to drag the inflation rate down.

“However, offsetting this has been a rise in food and drink costs, as we are all having to eat and drink every meal at home and so spending more money at the supermarket. In particular, some of these rises come from treats many people are buying from cake to chocolate or posh crisps.”

‘Inflation will likely spend the next few years far below 2%’

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.

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 2% 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.”