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Last Updated: Tuesday, 12 June 2007, 09:25 GMT 10:25 UK
UK inflation slows to 2.5% in May
Bank of England governor Mervyn King
Mervyn King has warned of higher rates to come
The UK's rate of inflation slowed in May to the weakest level in seven months, official figures have shown.

Consumer price inflation fell to 2.5% last month, against 2.8% in April, the Office for National Statistics said.

The Retail Prices Index, an inflation measure often used in pay bargaining, fell to 4.3% in May from 4.5%.

Analysts still expect the Bank of England to raise interest rates later this year to ensure that inflation falls to 2%, the government's target.

Bank warning

On Monday, Bank of England governor Mervyn King warned people to expect higher interest rates by the end of the year unless consumers and companies slow spending.

The Bank is by no means out of the inflation woods yet
Howard Archer, Global Insight

Mr King told the Welsh CBI that the Bank's Monetary Policy Committee was still concerned that spending was rising faster than the economy's ability to cope with the higher demand, and said that "more persistent inflationary pressures have picked up".

He also warned borrowers, especially those contemplating house purchases, that "it would be unwise to borrow so much that the repayments are affordable only if interest rates remain at their existing levels".

Despite four interest rates rises since August last year, there are still mixed signals as to whether house prices are falling across the UK.

"The Bank is by no means out of the inflation woods yet and another interest rate hike remains very much on the cards by August at the latest," said Howard Archer, chief economist at Global Insight.

Forward-looking financial markets in the UK are expecting base rates to reach 6% by the end of 2007.

Utility bills

Falling prices for gas and electricity, compared with the rises one year ago, was the main reason for the reduction in inflation, the ONS said.

Lower food prices, particularly for vegetables and meat, also helped to keep inflation in check.

However, food prices are still rising at 5%, twice the inflation rate.

The cost of air travel rose sharply compared with falls in the same month a year ago.

The core inflation rate, which excludes food, alcohol, tobacco and energy, was up to 1.9%, compared with 1.8% in April.

Inflation has now been above the government's target for 13 months.




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