Prices climbed 4.2pc in the year to June, according to the consumer prices index (CPI), a slowdown from the two-and-a-half year peak of 4.5pc hit in the previous two months, the Office for National Statistics (ONS) said.
While still more than double the Bank of England’s official 2pc inflation target, the headline figure surprised economists, who had expected it to stick at 4.5pc.
Graeme Leach, chief economist at the Institute of Directors, said the latest inflation figures “kill any chance of a rate rise this year” to rein in price rises. “And with inflation set to tumble in 2012, there may not be any rate rise next year either,” he said.
Month-on-month, prices fell 0.1pc – the first June fall in CPI inflation in eight years – as discounting on computer games, toys and other leisure items offset climbing food prices. Clothing and footwear prices also fell on May, as the summer sales began.
Core inflation, which strips out volatile energy and food prices, slowed to an annual 2.8pc from 3.3pc, its lowest since November. Economists said this could be the first concrete sign that households’ weak spending power is starting to rein in price pressures in the high street.
“That does not mean that inflation has now peaked – a rise to 5pc or above is still very likely in response to the lagged effects of previous energy and commodity price rises,” said Jonathan Loynes, chief European Economist at Capital Economics.
Last week, energy giant British Gas increased its gas and electricity prices by an average of 18pc for gas and 16pc for electricity, increasing the average household bill by £200 a year from August 18. Scottish Power also announced a price rise, with gas and electricity prices going up by 19pc and 10pc respectively from August 1.
However, Mr Loynes said the latest data suggested the peak may now be a little lower than previously feared. “The figures may give the MPC [the Bank’s Monetary Policy Committee] a bit more confidence that inflation will fall back sharply next year when food/energy effects finally wane,” he said.
The MPC has kept interest rates at a record low of 0.5pc since March 2009, as worries about the fragility of the economy weigh against calls to raise rates to rein in price rises. Mervyn King, who as the Bank’s Governor is a member of the MPC, said in its annual report on Monday that raising the bank rate significantly may well have seen inflation start to fall, “but only because the recovery would have been even slower and unemployment higher than now”.
Nonetheless, despite rates having stayed at a record low, analysts have started to warn that the economy may have shrunk in the second quarter of this year, increasing the risk of a double-dip back into recession.
Adding to a string of worrying economic data, the ONS reported Britain’s goods trade deficit with the rest of the world – the gap between goods exported and imported – widened unexpectedly in May to £8.5bn from £7.6bn the previous month.
“Looking at these results, it is clear that the contribution of net trade to GDP growth in Q2 is likely to be negative, as export growth is some way behind the growth in imports,” Nida Ali, economic advisor to the Ernst & Young ITEM Club. “Given the evidence from the rest of the economy, it appears likely that GDP growth will be barely positive in Q2.”
The inflation figures also showed UK’s retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, slowed – coming in at 5pc from the previous month’s 5.2pc.
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