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Inflation tumbles further

The consumer prices index (CPI) in Britain rose by 2.3% in the year to April, down from 2.9% in March but still above the government’s target level of 2%, according to the Office for National Statistics (ONS) (PDF).

The 60 basis point fall represents a steepening decline in CPI inflation, after the rate of inflation in the CPI fell by 30 basis points in March against February’s figure.

The retail prices index (RPI), which also includes mortgages, fell by 1.2%, its second month of deflation and a more drastic drop after a 0.4% fall in March. This was mainly propelled by falling mortgage interest payments after the Bank of England cut its interest rate to 0.5% in March.

The ONS said that the largest downward pressure on the CPI came from the costs of housing and household services – in particular, falling electricity and gas bills after steep rises a year ago. The prices of food and non-alcoholic beverages also fell.

Combined with yesterday’s news of the first drop in British wages for at least 40 years, the figures will raise fears of prolonged deflation.

However, Howard Archer, the chief UK and European economist at IHS Global Insight, described the RPI fall in a note as “artificial deflation, as it is very much the consequence of sharply lower mortgage interest payments”.

He added, “Nevertheless, given that many pay awards are still linked to retail price inflation, the deeper year-on-year decline in April will maintain the downward pressure on wages already coming from sharply higher unemployment and companies’ deteriorating profitability. As a result, many workers are likely to face wage freezes or even pay cuts.”

Consumer prices were partly affected by a rise in excise duties on alcohol and tobacco coming into effect a month later than last year. However, Archer says, “there is evidence that underlying inflationary pressures are being diluted as the recession hits the pricing power of companies and retailers”.

CPI inflation is falling less in Britain than in the eurozone, he said, mainly because prices have been pushed upwards by the depreciation of sterling. CPI inflation in the eurozone was 0.6% in April.

IHS Global Insight predicts further falls in inflation, but describes the data as “generally benign” and predicts that interest rates will stay at 0.5% for some time.

However, in a separate statement Henderson New Star said its indicator was “less gloomy” than the recent, separate inflation report from the Bank of England might suggest.

“[Our indicator] suggests that the Treasury’s forecast of a 1.25% rise in GDP in 2010 is achievable,” said Simon Ward, the chief economist.

Related Articles:
Wages fall for first time since 1930s
RPI inflation turns negative


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