British inflation falls to 2.2% in May, its lowest level since start of 2008, despite rise in the cost of imported goods due to the lower value of the pound

LONDON , June 16, 2009 () – Lower food costs and energy bills helped Britain's annual inflation rate in May fall to its lowest level since the start of 2008 despite a rise in the cost of imported goods due to the lower value of the pound, official figures showed Tuesday.

The Office for National Statistics said consumer price inflation in the year to May fell to 2.2 percent from April's 2.3 percent. The decline was far smaller than anticipated, however. The markets were expecting the headline rate to drop to the Bank of England's target of 2 percent. The CPI measure has now been above target for 20 months.

The rate has fallen every month except once since September's inflation peak of 5.2 percent.

The statistics office said there was upward pressure on prices from tax rises on alcohol and cigarettes emanating from April's Budget as well as from higher DVD prices stemming from the cheaper pound -- the lower pound makes imports more expensive.

According to the Bank of England's forecasts, inflation is set to fall to 1 percent or lower later this year as the recession bears down on prices. A fall below 1 percent would prompt a first letter from Governor Mervyn King to Britain's finance minister Alistair Darling to explain why CPI has undershot the inflation target by more than a percentage point.

Earlier this year, many economists reckoned that inflation in Britain would turn negative some time this year as the recession and falling energy prices combined.

However, most now think that's unlikely due to the weaker pound and hopes of an earlier than expected rebound in general economic activity.

"Inflationary pressures are more persistent than expected," said Charles Davis, an economist at the Centre for Economic and Business Research in London.

"This is likely to be partly caused by reduced purchasing power from a much depreciated sterling but may also symbolize that demand in the economy is less weak than in the height of the recession, lessening downward pressure on prices," he added.

In a separate inflation reading, the statistics office said the wider retail price index dropped by 1.1 percent in the year to May, against the 1.2 percent fall recorded in April.

Among other differences, the retail price index includes mortgage costs, which are not included in the consumer price index -- since October, mortgage rates have fallen sharply as the Bank of England has slashed its benchmark interest rate from 5 percent to the current all-time low of 0.5 percent.

The retail price index is important as it is used widely in wage settlements and in pension payments.

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