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Surprise fall in inflation rate delights market analysts

Reports from the Office for National Statistics have shown that inflation fell in by 4.5% to 4.2% from May to June of this year.

It is thought that price cuts by hard pressed retailers were the main reason for the largely unexpected fall in the rate of inflation.

However, the rate still sits at more than double the intended Bank of England target of 2%.

Mervyn King, the Governor of the Bank of England, has recently stated that he feels confident that rate of inflation will fall towards the intended target within 2 years. Howard Archer, of IHG Global Insight, yesterday agreed with him.

“We believe that there is a realistic chance that consumer price inflation will get back down to 2.0% by late 2012/early 2013,” claimed Archer.

Rising food prices continued to put serious pressure on the rate of inflation last month. However, the impact of rising supermarket bills was offset against reductions available elsewhere.

All of this points to little chance of a rise in interest rates any time soon. Hetal Mehta, UK economist at Daiwa, said “With no signs of a particularly marked acceleration (of interest rates) in the coming quarters, we now cannot see the Bank of England increasing interest rates for a long time to come – not just this year, but even next year for that matter.”

This fall represents the first drop in prices for 8 years, a further encouraging sign of the continued growth of the UK economy.

Archer went on to describe the drop as a “really nice downward surprise”. Archer feels it “ties in with reports that a significant number of retailers are engaging in earlier and deeper summer clearance sales to try to get hard-pressed consumers to part with their cash.”

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