THE price of fuel, clothing and energy continued to fall due to the coronavirus crisis, bringing the UK inflation rate to 0.5%, its lowest level in four years.
The Office for National Statistics (ONS) has confirmed that the consumer price index (CPI) inflation fell to 0.5% in May as a result of continued pressure on the UK economy .
The drop was less than 0.8% the previous month and means that inflation in the United Kingdom is now at its lowest level since June 2016.
Some economists predict that inflation could drop to zero percent in the coming months, while others say the UK is “slipping into deflation.”
Deflation, or negative inflation, is a decrease in the general price level of goods and services – it can occur when the supply of goods exceeds the aggregate level of demand.
It can also be triggered by lower production costs or a shortage of money in circulation.
What is inflation and how does it affect your money?
INFLATION affects the cost of everyday items, as well as wages and savings rates.
This means that it can really have an impact on families’ bank balances.
Today’s announcement will be good news for households, as falling inflation means that the price we pay for goods has gone down.
Inflation, which is measured by the Office for National Statistics, is also what the Bank of England uses as a guide for determining interest rates.
This means that inflation can also have a direct impact on mortgage costs and savings rates.
Low inflation is positive for savers because the interest paid on savings exceeds the increase in the cost of goods.
Right now, our savings are more likely not to be eroded by inflation, as the highest savings rate is currently higher than inflation, at 1.16%.
However, at stable levels, low inflation is good because it stimulates economic output and productivity while creating employment opportunities.
But out of control inflation can be disastrous for a country because the cost of essential goods and services can suddenly exceed the purchasing power of citizens’ wages.
See our inflation guide for more information.
The current inflation rate is nowhere near the 2% target set by the Bank of England.
This is because the latest ONS data showed that fuel prices fell 16.7% in May – the largest drop ever.
Fuel prices have plummeted due to the coronavirus shutdown affecting global demand for oil, although crude oil prices started to rebound last month.
Average gasoline prices were 106.2 pence per liter in May, while average diesel prices were 113.4 pence per liter – the lowest levels since 2016.
Meanwhile, clothing and footwear prices fell 3.1% in the past month, as retailers launched huge sales to encourage shoppers to start spending.
Energy costs, which fell 7%, also lowered inflation after regulator Ofgem lowered its default price cap.
The prices of games, toys and hobbies, such as computer game consoles, DIY kits and dolls, also fell.
But food and alcohol prices rose, up 1.8% and 2.6% respectively, with supermarkets being the only retailers allowed to stay open for the duration of the coronavirus shutdown.
The CPIH measure of inflation, which includes shelter costs, fell to 0.7% in May from 0.9% from the previous month.
While the Retail Price Index (RPI), the measure of inflation fell 1% in May after falling 1.5% the previous month.
Jonathan Athow, Assistant National Statistician for Economic Statistics at the Office of National Statistics (ONS), said: “Consumer price growth has slowed again to the lowest annual rate in four years.
“The cost of games and toys has dropped compared to last month’s increases when there was a continuing drop in pump prices in May, following the huge drops in crude prices seen in recent months.
“Outside of these areas, we see little significant change in prices in stores. ”
James Smith, an economist at ING, said: “We predict that this inflation gauge will remain between zero and 0.5 percent until the fall, and probably below 1 percent until the start of 2021.
“Certainly there may well be pockets where prices would rise in the short term.
“Supply chains are still severely disrupted and restarting will not be easy, especially given the continuing risk of additional localized closings if Covid-19 resurfaces in specific regions or countries.
“All of this inevitably means higher production costs. ”
Ulas Akincilar, sales manager at INFINOX, added: “Despite all the bullish talk about the reopening of street stores in England, consumer demand is faltering.
“Prices drop in most goods and services tracked by the ONS as the economy slips into deflation.
“While the overall CPI rate remains in positive territory, it has plunged to a third of what it was when the coronavirus struck. “
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Economists are preparing for the BoE to launch at least an additional £ 100 billion in quantitative easing (QE), which will print more money in the economy.
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