UK inflation slips lower

Falling food and fuel prices pushed inflation lower

The UK inflation rate fell sharply last month, official figures have shown.

The Office for National Statistics (ONS) said the underlying rate of inflation - which excludes mortgage repayments - fell to 1.8% in May from 2.3% in April.

Key points

Inflation has fallen thanks to lower food and petrol prices

The fall makes an interest rate rise in July less likely

A rate rise is still expected later this year, to damp down consumer spending and house prices

Inflation remains subdued in most of the world's big economies

Most analysts had predicted that underlying inflation would fall no further than 2%.

The decline, the steepest month-on-month fall in nine years, makes an early increase in interest rates less likely.

Rate warning

The Bank of England has been expected to raise borrowing costs soon in order to put the brakes on persistently strong consumer spending and galloping house prices.

Earlier this month, Bank of England governor Eddie George told MPs that interest rates would have to rise if domestic demand did not moderate.

UK underlying inflation

Dec 2001 1.9%

Jan 2002 2.6%

Feb 2002 2.2%

Mar 2002 2.3%

Apr 2002 2.3%

May 2002 1.8%

His comments were interpreted as the starkest warning yet that rates were set to rise.

A rise in the cost of borrowing would be expected to damp down consumer spending and cool the property market.

But it might also snuff out a tentative recovery in the manufacturing sector, which has been in recession for most of the past year.

Lowering interest rates is commonly seen as a useful anti-recession tool, the calculation being that cheaper borrowing encourages corporate and personal spending, so boosting economic growth.

On hold?

But the latest inflation figures make it less likely that the Bank's rate-setting monetary policy committee (MPC) will put up borrowing costs when it next meets on 3 and 4 July.

"The figures are significantly better than expected and may call into question whether the MPC will raise interest rates at its July meeting," said Philip Shaw, economist at stockbrokers Investec.

"Clearly there are no inflationary pressures in the near term."

The latest inflation figures are towards the bottom end of the bank's 1.5-3.5% target range for inflation.

Last year, the MPC cut interest rates by two percentage points in seven steps to their current 37-year low of 4% in an attempt at staving off recession.

The last cut came in November last year.

Cheaper petrol

The ONS said the fall in inflation last month reflected a dip in seasonal food and petrol prices last month compared with May 2001.

Last year, food prices had risen sharply because of weather damage to seasonal crops.

The headline rate of inflation - which includes mortgage repayments - also slipped lower, falling from 1.5% in April to just 1.1% in May.

This was lower than the 1.3% headline rate predicted by analysts.