Thursday, June 21, 2012

UK Inflation rate drops to 2.8% in May 2012.

The Office for National Statistics (ONS) has revealed that UK’s
  • consumer price index (CPI) fell from 3% in April to 2.8% in May and
  • retail price index (RPI) fell from 3.5% in April to 3.1% in May.
Most of the economists had predicted that the rate of inflation would not change in May on the contrary; the ONS data shows that inflation has actually fallen by 5.2% from last September due to decrease in energy, commodity and food prices. The earlier increase in prices was also attributed to the VAT rise in 2011 and as the economy adjusts, the inflation levels are expected to slow further in the coming months. 

The current economic environment is forcing retailers to reduce their prices to attract more customers. Last year, food and drink prices rose by 1.3% but in the current period, the retailers have increased their prices just by 0.3%.  

The Bank of England has predicted that CPI would remain above 2% “for the next year or so”.
Investors are of the opinion that the fall in inflation levels would strengthen the case for more quantitative easing (QE). "The fall in CPI inflation to 2.8% in May increases the likelihood at the margin of more quantitative easing (QE)... We expect £50bn with a sizable risk of a 25 basis point rate cut to boot,” said George Buckley at Deutsche Bank. QE is mechanism through which the government injects money into the economy to stimulate growth. 

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