Sir Mervyn King will not have to write letter of explanation as CPI inflation falls to 3%, a percentage point from target
Britain’s annual inflation rate fell to its lowest level in more than two years last month as bargains on the high street and a post-Easter cut in air fares helped keep price increases in check.
Figures from the Office for National Statistics showed that the cost of living as measured by the consumer prices index rose by 3% in the year to April, an unexpectedly sharp drop from the 3.5% annual rate recorded in March.
City analysts said the fall in inflation from its recent peak of 5.2% in September 2011 would help ease the squeeze on real incomes, which has been a factor in depressing consumer demand during the economy’s slide into a double-dip recession over the winter.
But evidence of the weakness of the economy was underlined by separate ONS data showing an underlying deterioration in the state of the public finances.
The transfer of the Royal Mail pension scheme to the state provided a £28bn windfall for the exchequer in April, resulting in a monthly surplus of £16.5bn.
Once the one-off Royal Mail effect was stripped out, however, net borrowing in April stood at £11.5bn – up from £9.1bn in the same month in 2011. The Office for Budget Responsibility, the independent body charged with economic and borrowing forecasts, said the deficit would have been £4.7bn higher had it not been for a number of special factors. Vicky Redwood, UK analyst at Capital Economics, described the underlying borrowing figure as “pretty nasty”.
The chancellor, George Osborne, welcomed the news on the cost of living. “It means that for the first time since I became chancellor, I have not this morning received a letter from the governor of the Bank of England explaining why inflation is off target,” Osborne said. “Indeed, it’s the first time since 2009 this has happened. This brings welcome relief to families on tight budgets – and the Bank of England expects inflation to continue to fall further over the next year or so.”
When it was granted operational independence in 1997, the Bank was charged with hitting an inflation target of 2% and the governor was obliged to write a quarterly public letter to the chancellor if it deviated by more than one percentage point from its goal. The current governor, Sir Mervyn King, has written nine letters to Osborne since he became chancellor in May 2010.
Tuesday’s data from the ONS showed that cold and wet weather limited price increases in clothing and footwear to 0.2% last month, compared with a 1.4% jump in April 2011. Smaller excise duty rises in the budget resulted in a smaller rise in the cost of alcoholic drinks last month than a year earlier. Prices overall rose by 0.6% in April, compared with a 1% jump in the same month a year earlier.
So-called “core inflation”, which strips out energy and food costs, also dropped sharply last month, from 2.5% to 2.1%. The cost of living measured by the Retail Prices Index – used as the benchmark for many pay deals – was up 3.5% in the year to April, after rising by 3.6% in the year to March.