Inflation fall puts QE firmly on the agenda

By Michael Millar

Date: Tuesday 19 Jun 2012

Inflation fell unexpectedly in May to back within the government's target level, raising expectations that the Bank of England would soon ramp up its quantitative easing programme.

The Consumer Prices Index (CPI) fell to 2.8% in May, from 3% in April, according to figures from the Office for National Statistics.

Analysts had expected it to remain steady but lower fuel prices, as well as food and drink, helped push it down.

The Retail Prices Index, which includes housing costs and is often used in wage negotiations, has fallen to 3.1% from 3.5%.

Both figures are at their lowest level since November 2009.

Vicky Redwood, Chief Economist at Capital Economics, said inflation would probably remain static in June, but should then start to fall more quickly and could be below 2% before the end of the year.

"Mervyn King’s comments last week indicated that more QE will soon be forthcoming and these figures might help to sway any of the more wavering members into voting for more stimulus," she said.

During his Mansion House speech last week the Governor strongly hinted there could be an increase in the Bank's £325bn asset purchase scheme.

CPI in the second quarter is currently averaging 2.9%, below the 3.2% average forecast by the Bank of England in May’s Quarterly Inflation Report.

At the last meeting of the Monetary Policy Committee there was an 8-1 vote against any expansion but the minutes noted that "for several members, the decision not to expand the asset purchase programme at this meeting was finely balanced".

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