Inflation fell to a four-year low of 0.5 per cent in May from 0.8 per cent in April as the cost of clothing and fuel tumbled during the coronavirus pandemic, the latest official figures show.
The Consumer Price Index, which measures the cost of a hypothetical basket of goods and services, dropped further below the Bank of England’s target of 2 per cent.
Prices for toys and games also fell but food and drink costs increased in a month where supermarkets dealt with supply problems and many shoppers experienced queues to buy groceries.
Petrol and diesel dropped by a record 16.7 per cent in May after oil prices slumped dramatically as countries around the world shut down large parts of their economies to slow the spread of Covid-19.
Lower fuel costs have a knock-on effect on the price of many other goods.
Energy costs dropped 7 per cent and clothing and footwear prices were down 3.1 per cent as retailers tempted reluctant shoppers with heavy discounts.
Jonathan Athow, deputy national statistician at the Office for National Statistics (ONS), said: “The growth in consumer prices again slowed to the lowest annual rate in four years.
“The cost of games and toys fell back from last month’s rises while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months.
“Outside these areas, we are seeing few significant changes to the prices in the shops.”
The ONS’s preferred measure of inflation, which includes housing costs for homeowners, fell to 0.7 per cent in May from 0.9 per cent in April.
Gathering comparable data on prices to build a picture of what consumers are experiencing was made more complicated by the fact non-essential shops were shut in May and one in seven of the goods the ONS tracks was not widely available.
In an attempt to combat this, May’s figures also included an alternative inflation measure using an experimental set of goods and services that exclude items like international air travel, which weren’t available to most people.
On this reading, inflation was even lower than the official rate, coming in at 0.4 per cent, or 0.6 per cent when housing costs are included.
Falling inflation will increase pressure on the Bank of England to stimulate demand in the economy by reducing interest rates this week when the Monetary Policy Committee (MPC) announces its latest decision on Thursday.
The Bank’s base rate is already at a historic low of 0.1 per cent with speculation mounting that it could go below zero for the first time – meaning lenders pay borrowers for the privilege of lending them money. However, some analysts think the Bank will keep rates where they are and instead pump more money into the system by ramping up its programme of buying bonds, or quantitative easing.
Paul Dale, chief UK economist at Capital Economics, said: “May’s further fall in inflation is probably only the beginning of a prolonged period of very soft price pressure that we think will prompt the Bank of England to announce a total of £350bn more quantitative easing, starting with £100bn, or maybe even £150bn, at tomorrow’s policy meeting.”
Andy Haldane, the Bank’s chief economist, said the central bank was looking more closely than before at negative interest rates, as well as other measures.
“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” Mr Haldane told The Telegraph in an interview published last month. “How could we not be?”
Silvana Tenreyro, who is one of nine people on the MPC, talked positively about the benefits of moving into negative territory.
“My personal view, which comes from the reading of the European experiences, is that negative rates have had a positive effect in the sense of having a fairly powerful transmission to real activity,” she told a London School of Economics webinar.
However, Bank of England governor Andrew Bailey said recently that reducing interest rates to below zero “is not something we are currently planning for or contemplating”, while cautioning that it was not wise to rule anything out.