Inflation falls below Bank's 2pc target

CONSUMER price inflation fell below the Bank of England target of two per cent for the first time since September 2007, official data showed yesterday.<br /><br />Figures from the Office for National Statistics (ONS) indicated that the consumer prices index (CPI) fell to 1.8 per cent in June, on an annual basis while the broader retail prices index (RPI) stood at -1.6 per cent. Falling food prices dragged both the CPI and the RPI lower.<br /><br />The figures were in line with analysts&rsquo; forecasts but further disinflation is widely expected, reaching a low of 0.9 per cent year-on-year in September.<br /><br />With prices falling, it is clear that measures like cutting interest rates and implementing quantitative easing are starting to have an impact on prices, but sticky inflation reinforces belief that the MPC can keep rates at 0.5 per cent well into 2010 and could well extend its QE programme.<br /><br />David Kern, chief economist at the British Chambers of Commerce (BCC) said: &ldquo;The figures confirm the BCC&rsquo;s assessment that in the short-term, the main policy priority must be countering the risks posed by recession and deflation.&rdquo;<br /><br />&ldquo;In the near future we urge the Bank of England to increase the scale of quantitative easing well beyond &pound;125bn,&rdquo; he added.<br /><br />Last week the Monetary Policy Committee (MPC) held off from extending QE and slowed the asset purchase rate, but incoming MPC member Adam Posen said yesterday at a Treasury committee hearing that this does not signal an end to quantitative easing.<br /><br />Posen, who is an expert on Japan&rsquo;s deflationary 1990s, said it was too early to speculate on when the Bank might start to withdraw quantitative easing. &ldquo;That is going to be a very tough call and it has to be part of an ongoing discussion within the MPC.&rdquo;