By Olesya Dmitracova and David Milliken
LONDON, June 19 British inflation eased
unexpectedly in May to its lowest in two and a half years due to
slower price rises for food and fuel, strengthening the chance
of more Bank of England stimulus as the economy increasingly
feels the heat of the euro debt crisis.
Britain entered its second recession since the 2007-2009
financial crisis around the turn of the year, and signs that the
euro zone crisis was deepening prompted policymakers last week
to announce a plan to flood the country's financial system with
billions of pounds to get a recovery moving.
In addition, BoE Governor Mervyn King hinted that more
quantitative easing might be on the cards, and the chances that
the programme will be restarted next month have been boosted by
Tuesday's official inflation figures.
The Office for National Statistics said consumer price
inflation slowed to 2.8 percent on the year from 3.0 percent in
April, confounding economists' forecasts for an unchanged
"King's comments last week indicated that more QE will soon
be forthcoming and these figures might help to sway any of the
more wavering members into voting for more stimulus," said Vicky
Redwood, economist at Capital Economics.
Sterling weakened against the euro and British government
bonds briefly rose after the data was released.
British inflation has been above the BoE's 2 percent target
since December 2009 and its slow fall earlier this year had made
some central bankers reluctant to inject more cash into the
economy despite signs that the recovery had stalled.
Between April and May, average consumer prices dropped by
0.1 percent - the first fall between these two months since
records began in 1996.
"(This) is good news and is providing some welcome relief
for family budgets," a finance ministry spokesman said.
The BoE has blamed high inflation for sluggish consumer
spending - which drives about 60 percent of Britain's gross
domestic product - and a forecast fall in inflation is one of
the reasons why it reckons growth will pick up later this year.
The central bank predicted in May that inflation was likely
to remain above target until the second half of next year before
falling to around 1.6 percent in two years' time.
The biggest contribution to May's fall in the annual
inflation rate came from a slower annual increase in the cost of
motor fuel - its smallest rise since October 2009 - as oil
prices dropped in the face of global economic weakness.
Another drag came from slower price inflation for food -
particularly grapes, bananas and peaches - while rises in
airfares due to the timing of Easter created the main upward
The one fly in the ointment was a year-on-year increase in
core inflation, which strips out volatile food and energy costs
and is sometimes viewed as a better underlying guide to price
pressures in the economy. This edged up to 2.2 percent from 2.1
percent in April, although some economists played down the
importance of the move.
"Core inflation nudged up," Redwood of Capital Economics
said. "But this mainly reflects a brief period of sharp
discounting this time last year and we had thought it would pick
up more sharply than this."