Prices rose 2.8 per cent in the year to May, down from three per cent in the year to April, the Office for National Statistics revealed, leading economists to forecast a new round of quantitative easing (QE) from the Bank of England.
The fall in inflation was driven by food and non-alcoholic beverage prices, which fell 0.3 per cent from April to May, while petrol prices fell 4.5p per litre on the month.
The cost of living measured by the retail price index (RPI) rose 3.1 per cent in the year to May, down from 3.5 per cent a month earlier.
The tax and price index (TPI), which takes into account the impact of tax changes on the cost of living, rose 2.6 per cent, from 3.1 per cent in the year to April.
Bank of England governor Sir Mervyn King strongly hinted last week that more QE could be on the way in an effort to combat the rapid deterioration in economic conditions – analysts think this fall in inflation will create more room for him to stimulate demand.
“The case for additional QE in response to faltering confidence is stronger – we expect the MPC to announce an additional £50bn in QE at the July policy meeting,” said Barclays’ Chris Crowe.
This is only the second month since late 2009 that CPI inflation has been within one percentage point of the Bank’s two per cent target, but the MPC may feel able to loosen policy as it forecasts stronger falls in inflation.