Inflation in the UK continued its downward trend in May as the Consumer Prices Index (CPI) annual inflation rate fell from 3% in April to 2.8% in May.

This is the lowest annual rate of increase seen since November 2009 when CPI inflation stood at 1.9%.

The annual inflation as measured by the Retail Prices Index (RPI) also fell in May to 3.1% from April’s 3.5%, the lowest rate since December 2009. (For an explanation on CPI/RPI differences please see the note at the foot of this article.)

Many analysts had expected inflation to hold at 3% in May so it has come as a bit of a surprise.

The downward pressure on CPI annual inflation in May were motor fuels and food & non-alcoholic beverages. With RPI the downward pressures came from petrol & oil and food but was somewhat offset by other travel costs (air).

Based on 2005 (May) being 100 the CPI now stands at 122.8, which effectively means that prices are 22.8% higher than in 2005.

The RPI now stands at 242.4 with January 1987 as the base point at 100, which means that using RPI prices are 142.4% higher than back in 1987.

CPI to May 2012-The Economic Voice

CPI to May 2012-The Economic Voice

RPI to May 2012-The Economic Voice

RPI to May 2012-The Economic Voice

Nida Ali, economic adviser to the Ernst & Young ITEM Club, said:

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.

“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.”

CPI is the governments preferred measure of inflation and differs from RPI as follows: (from the ONS website):

The RPI covers a range of costs excluded from the CPI, including:• Mortgage interest payments (MIPs)
• Council tax
• House depreciation
• Buildings insurance
• House purchase costs, e.g. estate agent fees
• TV licence
• Road fund licence
• Trades union subscriptionsThe RPI includes a price index for cars which is based entirely on used car prices.
The CPI covers certain charges and fees excluded from the RPI, including:• Stockbroker fees
• University accommodation fees
• Foreign student tuition fees
• Unit trust feesThe index for the purchase of new cars in the CPI is quality adjusted and based on actual published prices for new cars.
The RPI is representative of the majority of private UK households, but excludes the highest earners and pensioner households dependent mainly on state benefits. It includes expenditure both within the UK and abroad by UK households. Expenditure data (or ‘weights’) used to represent this population are derived from a number of sources but mainly from ONS’s Living Costs and Food Survey. The CPI is representative of all private UK households, and also includes the expenditure of institutional households(nursing homes for example) and foreign visitors to the UK. Only expenditure within the UK is covered. Expenditure data (or ‘weights’) used to represent this population are derived from National Accounts data and can therefore differ in magnitude from the RPI weights for similar components.

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