Temporary respite for squeezed UK households as inflation falls for first time in eight months

By Adrian Lowery


The squeeze on households exerted by soaring prices and non-existent pay rises has relented somewhat, with inflation falling for the first time since September last year.

Average prices went up by 2.4 per cent compared to a year earlier, according to the Office for National Statistics' consumer prices index - but that was down from a rate of 2.8 per cent in March, and considerably lower than had been expected by analysts.

The drop in overall inflation was due to lower petrol prices and air fares pushing overall transport prices down for the first time in almost four years.

Inflation has come down from a lofty 5% in April 2011, but is still stubbornly above the BoE's 2% target.

Inflation has come down from a lofty 5% in April 2011, but is still stubbornly above the BoE's 2% target.

But the dip in inflation, which is still above the Bank of England's 2 per cent target rate, is expected to provide only a temporary respite for households.

The Bank expects inflation expected to spike above 3 per cent in the summer, as rising gas, water and electricity bills feed through.

Even at 2.4 per cent it far outstrips wage rises, which grew at just 0.4 per cent in the first quarter versus a year earlier.

James Knightley, economist at ING Bank, said: 'We may see headline inflation rise modestly again in the next couple of months as sharp falls in petrol prices last summer drop out of the annual comparison, but we agree with the Bank of England that the trend will be downwards thereafter.

'Moreover, with wage growth being so low at just 0.4 and inflation expectations remaining contained, there appears to be very little threat of a wage-price spiral in the UK.'

The pace of the fall in CPI inflation surprised economists, who had expected CPI inflation to edge down to about 2.7 per cent in April.

Falling transport costs were by far the biggest factor behind the inflation dip.

Falling transport costs were by far the biggest factor behind the inflation dip.

Howard Archer, economist at IHS Global Insight, said: 'April's marked drop in inflation to a seven-month low of 2.4 per cent is very welcome news, providing significant relief for both consumers and the Bank of England.'

But Alan Clarke at Scotiabank said while it was a 'big downward surprise', much of the fall is likely to be temporary.

Lower transport prices provided the biggest contribution to the fall in inflation, after the price of a barrel of crude oil fell by 6.8 per cent on the month. Transport costs fell for the first time since July 2009, dropping 0.6 per cent on the month, aided by lower prices for long-haul and European flights.

Petrol prices fell by 2.1p over the month to 136.4p a litre compared with a 3.2p rise a year earlier. Diesel was 3.9p lower to 141.7p per litre, compared with a 2.1p rise a year ago.

Air fares fell by 6.4 per cent on a month earlier, compared with a rise of 7.4 per cent a year earlier.

The only notable upward effect came from food and non-alcoholic drinks. Prices rose by 0.7 per cent on the month, compared with a 0.1 per cent fall a year earlier, as farmers pushed through price rises after the freezing winter ruined crops.

Inflation has remained stubbornly above the Bank of England's 2 per cent target since December 2009.

Accounting giant Ernst & Young yesterday estimated that high inflation has cost the economy 10billion over the last three years.

Its report warned households face spiralling energy and food bills and rail fares that will keep inflation as high as 2.6 per cent throug 2014 and into 2015.

However, a separate report yesterday showed inflation fears receding. Financial information company Markit said that while people still feel that their finances are deteriorating, the pressure on them has eased to the weakest level in three years.

The fall in CPI inflation was the first since the fall from August to September 2012.

The fall in CPI inflation was the first since the fall from August to September 2012.

Markit added there were hopes household finances were entering a period of relative calm after the rocky ride of recent years.

Today's figures showed retail prices index inflation, which includes housing costs, fell to 2.9 per cent in April from 3.3 per cent in March.

Recently launched experimental measures of inflation: CPIH, including housing costs, and RPIJ, which was created to iron out the gap formed by the different methods of calculating the price of goods, fell to 2.2 per cent and 2.3 per cent respectively in April.

A Treasury spokesman said: 'This is good news for families and businesses. Inflation is down by more than a half from its peak.

'The Government has taken consistent action to help with the cost of living. Fuel duty and council tax have been frozen and hundreds of pounds has gone back into people's pockets through increases in the tax free personal allowance.

'As the governor of the Bank of England indicated last week, the economy is healing. The deficit is down by a third, more than a million and a quarter new private sector jobs have been created and interest rates remain near record lows.'

The Bank of England recently downgraded its inflation forecasts, predicting CPI inflation will peak at about 3.1 per cent in the summer, instead of its previous forecasts of about 3.5 per cent.

Economists said weaker-than-expected inflation will give the Bank more scope to resume economic stimulus through quantitative easing.

The Bank held its asset purchase programme at 375billion this month, and monetary policy committee minutes published tomorrow may show outgoing governor Sir Mervyn King changed his mind over another 25billion of QE as the economy has made a better-than-forecast recovery.

Sir Mervyn recently declared the recovery is in sight and upgraded UK growth prospects. He hands over to new governor Mark Carney in July.

The comments below have not been moderated.

Obviously there is relation between fuel price and inflation. I hope Osborne learnt from the history... so please reduce the fuel duty.

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I don't believe these figures have they factored in rocketing energy,fuel and food prices because that would put inflation at 15% or more.

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Click to rate     Rating   1

When are those who write these articles going to understand that inflation is not falling; falling inflation is deflation! What we have is a reduction in the rate of inflation - things are just increasing in price a little slower.

Click to rate     Rating   7

Oh well then, that's alright, back in a moment, just off to book the jolly to Vegas with my mates and order that new Volvo V40 I've taken a fancy to.

Click to rate     Rating   4

Going up less slowly, does not mean falling, falling would mean prices were getting cheaper & they're not.

Click to rate     Rating   10

Temporary respite for householders? Absolute rubbish. Household finances are at an all time low. With rising prices across the board, and ordinary people having no wage increases or very minimal increases at best, to cope with ever increasing bills. The British people have not created this economic crisis, the government have......AND...The statement by Governor of the Bank of England that the economy is healing, is a farce. The Bank of England is state owned, with up to 97% of the UKs money supply privately controlled, being in the form of interest bearing loans created by the big commercial banks. Do I believe any of their reviews? NO

Click to rate     Rating   5

Talk about a fix .. coincidence that all this news comes just as King is retiring .. strange I feel.

Click to rate     Rating   3

beats me why the Pound is falling on the forex market today... One would think that "lower than expected inflation" would be GOOD news for Sterling? Oh I forgot. Less inflation means less pressure to raise interest rates. Raising rates when inflation is already falling, and close to zero as it is, means risking negative inflation or DEflation. Imagine a country where you have to pay the bank to put your money in it? That might become a reality yet. Switzerland is already there, Japan almost so as well. The next interest rate move cannot anymore be considered a "racing certainty" to be UP.

Click to rate     Rating   2

The misleading headline make it sound like prices are falling. They are still rising, just at a slower rate.

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