UK Economy: Inflation Falls In June With CPI Falling From 2.8% To 2.4%

More Bang For Your Buck: Inflation Falls In June
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The rate of inflation dropped to a 31-month low last month, official figures showed today, as record rainfall forced clothing retailers to bring forward their summer sales.

The consumer price index (CPI) rate of inflation fell to a lower-than-expected 2.4% in June, from 2.8% in May, the Office for National Statistics (ONS) said. City analysts had forecast the rate to drop to 2.7%.

The fall in CPI was driven by a record May-to-June decline in clothing and footwear prices, which the ONS said was more typical of the June-to-July period, reflecting earlier than average seasonal discounting.

Inflation has fallen from 5.2% last September due to the waning impact of the VAT hike at the start of 2011, falling energy, food and commodity prices, and a number of bill cuts from utility providers.

Howard Archer, Chief UK and European Economist at IHS global insight, said the fall was "very good news" for consumers and the Bank of England.

"This reduces further the squeeze on consumers’ purchasing power and facilitates further Quantitative Easing by the Bank of England later this year should the economy fail to show underlying improvement over the coming months," he said in a statement released on Tuesday morning.

Inflation is now within 0.5 percentage points of the Government's 2% target.

Chloe Smith, the Economic Secretary to the Treasury, said: "Inflation has more than halved since September, meaning a little less pressure on family budgets. This lower inflation should support high street spending and growth in the economy in the months to come."

Last month's drop will add weight to the Bank of England's decision earlier this month to pump more emergency cash into the economy through its quantitative easing programme.

The steeper-than-expected fall is also likely to raise the likelihood of further emergency support later this year as the UK struggles with weak growth.

Britain's economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2%, following a 0.3% drop in the final quarter of 2011.

The overall rate was also driven down by transport prices, which dropped 0.5% as petrol and diesel prices continued to fall.

Consumers also benefited from lower fuel prices, as the price of petrol at the pump fell by 4.3p to 132.8p in June and diesel dipped by 0.7p to 135.6p.

Food also helped pull down the overall rate as prices edged 0.1% lower. The ONS said the biggest fall within food came from meat prices, which fell 0.5%, with reports that the recent washout weather had hit demand for barbecue foods.

The largest upward effect on prices came from recreation and culture, in which the price of digital cameras fell at a slower rate than last year.

Alternative measures of inflation also fell, as the retail price index fell to 2.8% in June, from 3.1% in May.

Azad Zangana, European Economist at Schroders said in a statement: “The UK’s inflation rate is only just beginning to reflect the weakness in the economy. Past increases in taxes have caused a squeeze on household spending power, which in turn is forcing retailers and service providers to scale back price increases. Though the sudden fall in the headline rate will raise some concerns over the health of the economy, the Office for National Statistics has had problems reporting price information when retailers use heavy discounts during the ‘sale season’. As a result, this could prove to be a temporary downwards blip in the inflation data."