Sales of beer and TVs push down inflation as fuel hits record high

By Sean O'Grady, Economics Editor

Wednesday, 16 June 2010

The World Cup helped to push down inflation in May, thanks to retailers promoting sales of televisions and beer.

The annual rate of consumer price inflation (CPI) fell from 3.7 per cent in April to 3.4 per cent last month, marginally below market expectations. The retail price index (RPI), which includes house prices, fell from 5.3 per cent to 5.1 per cent.

This is the usual benchmark for pay negotiations and uprating of welfare benefits, and its generally higher rate reflects the increase in house prices over the past year.

The Office for National Statistics said prices of televisions, which have been falling by 5 or 6 per cent a year, dropped by almost 10 per cent in the 12 months to May. Retailers have reported a surge in sales of widescreen and high-definition TVs.

The price of beer in supermarkets dropped by 3 per cent in May alone. Indeed, the fall in the cost of ales and lagers to thirsty football fans may in fact be underrated in the ONS data because the statisticians do not take into account "buy one, get one free" deals. Almost every supermarket has been stacking multipacks of beer at entrances and other prominent locations.

Subsiding food price inflation and the fact that the increase in duties on alcohol and tobacco happened in April rather than May this year also helped the index lower. Generally subsiding inflation in motoring costs also helped, but the ONS pointed out that the average price of a litre of petrol reached an all-time high of 121.3p on its readings – equivalent to £5.51 per gallon for pre-metric motorists.

City economists were relieved that inflation, which is way above the Bank of England's official target of 2 per cent, has slipped back as much as it has, though concerns remain. Michael Sunders, of Citigroup, said: "Annual CPI inflation in the second quarter averages 3.55 per cent so far, whereas a year ago the Monetary Policy Committee forecast that CPI inflation in the second quarter of 2010 would be 0.75 per cent. Inflation expectations for the near term among the general public already have risen markedly, and the MPC will remain vigilant for risks that relatively high headline inflation, far above the 2.0 per cent target, destabilises longer-term inflation expectations."

Britain's inflation rate is the highest in the European Union except for Greece, Hungary and Romania. The Bank of England's Governor, Mervyn King, has said that the current strong inflationary pressures are largely a result of high commodity prices and the declining value of sterling, and that CPI would fall sharply later this year.

Core inflation, which excludes seasonal and volatile items such as alcohol and fuel, stands at 2.9 per cent, down from 3.1 per cent last month, suggesting some easing in underlying inflationary pressures.

David Kern, of the British Chambers of Commerce, said: "Given the continued weakness of the economy and the tough deficit-reduction measures expected in next week's Budget, it is important for the MPC to maintain low interest rates for a prolonged period."