Inflation dip to ease rate worries

INFLATIONARY fears will ease this week when the main benchmark for the cost of living is expected to fall following April's 17-month high.

The consumer prices index (CPI) for May, published on Tuesday, is forecast to ease 0.3 per cent to 3.4 per cent, reducing the pressure on the Bank of England to raise interest rates.

The Paris-based Organisation for Economic Co-operation and Development last month called on the Bank's monetary policy committee to raise interest rates to "more normal levels" from the summer amid mounting concern over the UK's cost of living. At 3.7 per cent, April's CPI figure was almost double the MPC's target inflation rate of 2 per cent.

However, this week's fall in the CPI will widen the scope for the MPC to maintain rates at their historic low until the economic recovery is assured.

The MPC last week chose to keep the cost of borrowing at 0.5 per cent as its members await the outcome of Chancellor George Osborne's emergency Budget on 22 June.

Most economists now expect rates to remain at the present rate until the fourth quarter with some even suggesting that it may be 2011 before the Bank pushes them onto an upward trajectory.

Howard Archer, chief UK and European economist at IHS Global Insight, said last month's fall in oil prices was likely to have brought the CPI down to 3.4 per cent. "Given that oil prices bottomed out in the first quarter of 2010 and then firmed, oil-price related base effects should become more favourable."

Although inflation is falling, economists are already warning of the potential impact of a hike in VAT – as is widely expected either in the emergency Budget or later in the year.