Europe News

UK inflation slides to lowest since October 2009


Falling food prices pushed U.K. inflation down once again in May to its lowest level since October 2009, as price growth remains well below the Bank of England's target of 2 percent.

Consumer prices rose by just 1.5 percent year-on-year in May, according to Britain's Office for National Statistics (ONS) on Tuesday. This figure marked a slide from April's 1.8 percent rate and was significantly below expectations of 1.7 percent.

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The drive lower came from the price of food and non-alcoholic drinks, which slid 0.6 percent year-on-year - the first price fall since March 2006, the ONS said. The inflation rate for these items is now at its lowest level for over nine years.

Simon Dawson | Bloomberg via Getty Images

It comes as British supermarkets' pricing war intensifies, according to Howard Archer, chief U.K. economist at IHS Global Insight. In what has become known as a "race to the bottom", the so-called "big four" supermarkets – Tesco, Asda, Sainsbury's and Morrisons – have cut prices in an effort to recapture market share from their lower-end rivals, Aldi and Lidl.

There was also an impact from a fall in transport costs, which were likely boosted by tourism in April as a result of the late Easter.

Following the data release, the pound fell to $1.6938 from around $1.6977, and by 10 a.m. BST was trading at $1.6960. It comes after the currency hit a five-year high against the greenback on Monday.

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The data could temper expectations that Bank of England Governor, Mark Carney, will hike interest rates this year. Until now, there have been growing calls for a rate rise sooner rather than later after signs of a strengthening economic recovery in the country, and as unemployment falls faster than expected.

"It will go some way to abating the aggressive calls for a rate hike from the Bank of England this year, especially so following Carney's hawkish comments last week and other more recent comments from MPC (Monetary Policy Committee) members since," Alex Edwards, head of the corporate desk at UKForex, said in a note.

"We could well see one or two votes for a rate hike at the last meeting when the MPC minutes are released tomorrow – the BoE Governor may have been prepping the market for such a scenario, but this recent inflation data will put a small dent in expectations for a rate hike this year."

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Archer said the fall in inflation in May was unlikely to dilute mounting expectations that the central bank will start to edge up interest rates before the end of 2014.

"Nevertheless, persistently low consumer price inflation below the 2.0 percent target rate does provide the Bank of England with appreciable flexibility over when it wants to make its first interest rate hike," he said in a note. "And it also facilitates the Bank of England only edging interest rates up very gradually so as to nurture broad-based growth."