Inflation falls to 3.2%

Consumer price inflation has fallen to 3.2%, driven down by lower fuel prices, official data showed today.

The fall from 3.4% in the consumer price index (CPI) relieves some of the pressure on the Bank of England for a rapid interest rate hike. The rate is still well above the Bank’s 2% target, but the slight drop adds weight to the Bank’s argument that the high inflation rate is only temporary and that rates must stay low to help the economic recovery.

After the news, the pound rose against the dollar from $1.4965 to $1.5040.

While the Office for National Statistics reported that falling petrol and diesel prices were by far the biggest drivers behind the fall, declining prices for clothing and footwear also had an impact.

Conversely, the largest upward pressure came from air transport and miscellaneous goods and services, specifically rising house contents and car insurance premiums.

The retail price index (RPI), the other leading measure of inflation which includes housing costs, was 5%, down from 5.1% in May. This fall was slightly less than expected, while the decline in CPI was as anticipated.

Members of the Monetary Policy Committee have been outspoken in playing down the long-term impact of price rises. The exception is MPC member Andrew Sentance who believes inflation has been persistently higher than forecast because the Bank of England has misunderstood what has been driving prices higher and has overestimated the downward pressure on prices.

In a speech today, Sentance pointed out in a speech today that in 36 out of the 45 months he has served on the MPC, CPI inflation has been above the 2% target.

Sentance reiterated the reasons for his confidence that the economy will improve, dismissing the impact of short term financial shocks on monetary policy.

‘We are bound to experience setbacks in financial sentiment from time to time. This is entirely understandable given the shocks we have seen in recent years. We may need to be prepared to live with this nervousness for some time to come – and it should not be the dominant influence on the policy and judgements of the MPC, which should be based on the performance of the real economy and the outlook for inflation,’ Sentance said.

Making reference to a 1970s Led Zeppelin film and soundtrack called ‘The Song Remains the Same’, Sentance said: ‘The question in my mind now is how long the monetary policy song can remain the same, when it might be out of tune with the rest of the background music from the real economy - of economic recovery and above target inflation.’