Page last updated at 09:51 GMT, Tuesday, 19 May 2009 10:51 UK

Further slowdown in UK inflation

Inflation graph

UK annual inflation slowed in April as consumers' energy and food bills continued to drop, figures show.

The Consumer Prices Index (CPI) fell to 2.3% from 2.9% in March, the Office for National Statistics (ONS) said.

The decline was more than economists expected. The annual inflation reading was the lowest in more than a year.

Another measure of inflation, the Retail Prices Index (RPI), fell further to -1.2% from -0.4%, the biggest drop since records began in 1948.

'Deflation risk'

The decline in RPI inflation was larger than economists had predicted, and comes after the March figure showed the first negative reading since 1960.

Underlying inflationary pressure is still extremely weak, and is likely to remain so
Colin Ellis, Daiwa Securities

The figures are a "reminder that excessively low inflation, or deflation, is still a bigger risk over the next few years than a rapid rise in inflation," said Jonathan Loynes, an economist at Capital Economics.

The ONS said the fall in the rate of annual inflation was driven by lower electricity and gas bills, as well as cheaper food costs.

RPI was driven down by the same factors, as well as lower mortgage interest payments and home insurance, the ONS added.

While the CPI is important as the rate that is targeted by the Bank of England in setting interest rates, the RPI is used by many companies as the starting point for wage bargaining.

The subtext of last week's Inflation Report from the Bank of England was that fears of deflation are not what they were
Stephanie Flanders, BBC economics editor

The key difference is that the RPI measure includes mortgage costs, which have dropped significantly as the Bank has cut interest rates over the past year.

The official CPI figure is still above the government's target of 2%, but the Bank expects it to fall further during this year.

"Underlying inflationary pressure is still extremely weak, and is likely to remain so, particularly given the rapid and ongoing deterioration in the labour market," said Colin Ellis, an economist at Daiwa Securities.

The pound rose 1% against the dollar, trading at $1.5482, while it rose 0.3% against the euro to 1.1135 euros.



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