by Azad Zangana, European Economist at Schroders
“UK inflation fell sharply between May and June 2012 against city expectations of no change. Annual inflation, as measured by the Consumer Price Index (CPI), fell from 2.8% to 2.4%, and the Retail Price Index (RPI) also fell from 3.1% to 2.8%, highlighting the broad nature of the fall in inflation.
“Although the fall in the price of petrol and diesel made a significant contribution, clothing and footwear made the largest contribution overall. Indeed, the fall clothing and footwear was twice as large as the next largest fall in month on month inflation since the CPI was launched in 1996.
“The UK’s inflation rate is only just beginning to reflect the weakness in the economy. Past increases in taxes have caused a squeeze on household spending power, which in turn is forcing retailers and service providers to scale back price increases. Though the sudden fall in the headline rate will raise some concerns over the health of the economy, the Office for National Statistics has had problems reporting price information when retailers use heavy discounts during the ‘sale season’. As a result, this could prove to be a temporary downwards blip in the inflation data.
“Overall, the latest inflation numbers help justify the Bank of England’s decision to expand its Quantitative Easing Programme earlier this month, and could even lead the Monetary Policy Committee to add further stimulus in the future.”