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June 12, 2007

Continued Decrease in Inflation Rate

by Gill Montia

Story link: Continued Decrease in Inflation Rate

According to Government statistics, the rate of inflation continued to decrease in May, although this is unlikely to affect the prospect of further interest rate rises.

The Consumer Price Index, which is the Government’s preferred record of inflation, increased by 2.5% during the month, compared with 2.8% in April. The decrease is attributed to a reduction in energy bills following a number of price cuts from the main gas and electricity providers. The cost of food and non-alcoholic drink also decreased.

The retail prices index measure of inflation, which is often seen as a more representative measure, as it includes housing costs, also slowed in May. It dropped to a rate of 4.3%, compared with 4.5% in April.

Inflation has been decreasing since March, when the Consumer Price Index rose 3.1%, the highest increase in 10 years. At this point the Bank of England Governor, Mervyn King, was obliged to explain to the Chancellor why the Bank had failed to keep inflation within 1% of the 2% Government target. The Bank has a long-term target of 2% for inflation although this has now been exceeded for several months.

The Bank’s Monetary Policy Committee has decided to hold interest rates during June but at the same time, a large number of economic indicators, including property price increases, have remained elevated. Further interest rate increases are considered likely by August.

 

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