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Inflation unexpectedly falls back to 4.2%

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Heavy discounting in the retail sector of fashion and games, toys & hobbies helped push inflation down in June, new figures revealed today.

The Consumer Price Index (CPI), the official measurement of inflation used by the UK government, fell to 4.2 per cent last month compared to 4.5 per cent in May 2011, according to data from the Office for National Statistics (ONS).

Following rising but weak retail sales reported by the British Retail Consortium earlier this morning, the ONS has reported that the price of clothing & footwear declined by 1.9 per cent in June compared to the previous month.

Prices in recreation and culture fell by 0.9 per cent between May and June this year compared with a rise of 0.5 per cent between the same two months a year ago, with the biggest downward pressure coming from computer games.

Jonathan Loynes, Chief European Economist for Capital Economics, commented: “No doubt some of June’s unexpected drop in the headline CPI inflation rate from 4.5 per cent to 4.2 per cent reflected the unwinding of temporary factors which have exacerbated the upward trend over the last month or two.”

“But the fall in the core (ex. food and energy) inflation rate from 3.3 per cent to 2.8 per cent might be the first real sign that the weakness of households’ spending power is starting to bear down on underlying price pressures on the high street.”

Despite the fall in many non-food segments, food prices continued to rise during the period, up 0.9 per cent in the month, with the cost of bread, cereals, meat, milk, cheese and eggs the biggest upward pressures on inflation.

Inflation remains well above the government’s target of two per cent but the Monetary Policy Committee (MPC) has been moving away from raising interest rates in recent months.

“The figures may give some members of the MPC a bit more confidence in their view that inflation will fall back sharply next year when food/energy effects finally wane,” Loynes added.

“Along with the growing concerns over the outlook for the global economy, today’s figures add support to the growing view that UK monetary policy is more likely to be loosened than tightened over the next year or so.”

Published on Tuesday 12 July by Editorial Assistant

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