Inflation has unexpectedly fallen to 2.8% in May from 3% in April which is the lowest level that it has been in 27 months. The fall could open the door for the Bank of England to inject more money into the economy with quantitative easing. The monetary policy committee could now recommend the injection of up to £50million in the coming months to try to stimulate growth in the economy.
The fall in the consumer price index (CPI) rate of inflation was expected to remain unchanged by city analysts, but is being attributed partly to the sharp fall in fuel prices at the petrol pumps according to the Office of National Statistics (ONS). Average petrol prices fell by 4.5% to 137.1p.
Rob Carnell, of ING, said: ‘Weaker inflation, alongside a string of weak activity data recently, will help the Bank of England to make the case for further QE at their July 5 meeting. We expect eventually, the Bank’s asset purchase scheme to be expanded to £450billion – it is currently £325billion. As well as helping to push gilt yields lower, today’s numbers, in conjunction with increasing expectations of more BoE QE, will help keep sterling soft, providing further support for the UK’s manufacturing sector, which has struggled in recent months in response to floundering euro zone demand.’
The UK economy is in a fragile state, especially in light of the deepen Eurozone crisis making QE look much more likely, further supported by comments by Sir Mervyn King, who said on Thursday night: ‘the case for further monetary easing is growing’.
The report by the ONS said that the decline illustrates that conditions for consumers remain tough, largely due to weak income growth.
Chief Secretary to the Treasury Danny Alexander said the drop was “good news for the British economy” and “a welcome respite”.