By Marcus Leach
David Kern, Chief Economist at the British Chambers of Commerce (BCC), has said that the falling inflation rate will reduce the squeeze on businesses and consumers.
A slow down in food and fuel prices has seen the rate of inflation in the UK fall to 2.8% in May, its lowest level since December 2009.
Despite predications that the rate would not reach its target level of 2% for at least a year, the drop is both timely and welcome.
“The large decline in the May inflation figures is good news. If current trends continue, the squeeze felt by many businesses and consumers will begin to ease," said Kern.
"Disposable incomes will improve, which will in turn give a significant boost to consumer spending. While inflation is still above the 2% target, it is heading in the right direction. Compared to its 5.2% peak in September 2011, annual CPI inflation has almost halved.
“The latest inflation figures may increase calls for more quantitative easing (QE). The Bank of England should not rule this out if the eurozone collapses, as this would put pressure on our banking system. But we know that additional QE has not made much of a difference to businesses on the ground.
"Unless we are facing a global shock, the government must instead ensure that the measures to improve liquidity and lending to businesses announced last week are implemented effectively and without delay. The government should go further and consider introducing a state-backed business bank to facilitate access to finance for new and growing companies. Deregulation and investment in infrastructure must also be key ingredients of a long-term growth strategy.”
Nida Ali, economic advisor to the Ernst & Young ITEM Club, also said that today’s figures will come as a huge relief to the MPC, and expects inflation to come back towards the 2% target by the end of this year.
“Today’s CPI inflation figures will come as a huge relief to the MPC. Temporary factors that had been keeping inflation elevated for over a year are finally starting to fall out of the calculation," Ali said.
“The headline figure is lower than we expected. Although petrol prices, which hadn't started falling at the time of the April figures, were always expected to exert a significant downward pressure on overall prices, we expected this to be offset by higher air fares which were low last month due to the timing of Easter.
“This data strengthens our conviction that inflation will come back towards the 2% target by the end of the year and sets the scene for further monetary policy easing. In recent speeches, the Governor has already made it clear that the case for implementing more QE has risen and today's data gives the Bank increased flexibility to put this into effect. We wouldn't be surprised if the Bank authorised further asset purchases as early as next month.”
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