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UK Economy: Falling Fuel Costs Ease Inflation

(c) Sky News 2012

There has been another fall in the headline rate of inflation as lower fuel costs helped ease the pace of wider price increases in the economy.

The Consumer Prices measure, CPI (Berlin: CEJ.BE - news) , dropped to an annual rate of 2.8% in May from 3% the previous month meaning it now stands at its lowest level for two-and-a-half years.

Economists said the figure, released by the Office for National Statistics (ONS), gives the Bank of England more potential leeway to inject additional cash into the economy through its programme of quantitative easing (QE).

Slower price rises for food also fed into the performance as the CPI measure continued its path back towards the Bank's 2% target.

The Monetary Policy Committee forecast in May that inflation was likely to remain above 2% until the second half of next year.

The stubborn nature of inflation had previously prevented the MPC (KOSDAQ: 050540.KQ - news) expanding QE - effectively asset purchases to boost money supply - beyond its current total of £325bn for fear of stoking the headline rate further.

The minutes of this month's meeting are released on Wednesday.

The ONS said the biggest contributors to the fall in the annual CPI rate came from food, non-alcoholic drinks - particularly from grapes, bananas and peaches - and fuel.

The average petrol price fell by 4.5p per litre between April and May to stand at 137.1p.

That was driven by falling oil costs in the wake of world economic weakness - and they have continued to drop substantially this month to below $100 a barrel for Brent crude.

It currently stands just above $95.

Upward pressures came from rises in airfares due to the timing of Easter.

Inflation has fallen from 5.2% last September due to the waning impact of the
VAT hike at the start of 2011 and falling energy, food and commodity prices,
easing pressure on squeezed household incomes.

The ONS said the wider measure of inflation called RPI, which includes housing costs, also fell back in May to 3.1% from 3.5%.

Trevor Williams, chief economist at Lloyds Bank, told Sky News the inflation figures indicate that the gap between price increases and wage growth could be eroded by Christmas.

He added: "Price inflation should be under downward pressure towards the second half of this year which is clearly good news in so far as high inflation - when it outstrips pay - does tend to erode real consumer spending."