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hot air baloon with the words inflation written being held down by ropes with former BofE Chairman Mervyn King tightening ropesThe Consumer Prices Index fell to 1.49% in May compared with 1.82% in April, according to The Office for National Statistics. This is the sixth consecutive month that inflation has been below the Bank of England’s 2% target.

Lower fares for flights and a fall in food prices helped to push the rate of inflation down to its lowest level in four-and-a-half years in May.

The ONS said the price of food and non-alcoholic beverages fell by 0.6% year-on-year in May, the sharpest fall in a decade. In particular, falls in the price of everyday basics such as bread, cereals and vegetables drove the drop.

In addition the ONS said the timing of Easter, which fell in April this year, was likely to have had an impact on the rate of inflation, particularly on travel costs, which rose sharply to coincide with the Easter holiday.

RPI has also Fallen

The rate of inflation, as measured by the Retail Prices Index (RPI) also fell to 2.4% in May from 2.5% in April (Follow this link  to a previous blog to find what the difference is between ROI & CPI)

Average earnings, which rose 0.7% in the three months to April, (2.8% on an annualised basis) are finally starting to outstrip inflation. If they continue to rise at a similar rate over the next nine months, the feel good factor may well be back by the time of the General Election next May, which is good news for the coalition.

Separate figures from the Office for National Statistics showed that UK house prices leapt by 9.9% in the 12 months to April to reach a new high of £260,000.

Jeremy Cook, chief economist at the currency company, World First, said the bigger-than-expected fall in the rate of inflation meant there was no rush for the Bank of England to raise interest rates. “There is pressure on Mark Carney and the rest of the MPC to hike rates on the back of growth and housing market concerns, but given their central mandate of price stability, there is little cause to alter the current policy as it stands,” he said.

Howard Archer, chief UK and European Economist at IHS Global Insight, said he expected inflation to remain below 2% for the rest of the year and “very possibly beyond”. “This is very good news for consumers’ purchasing power and it also affords the Bank of England flexibility, as it toys with the idea of raising interest rates before the end of 2014,” he added.

George Osbourne wants to increase tax reciepts

George Osbourne

The chancellor, George Osborne, said the fall in the inflation rate was “good news”. He added, “This is another sign that our long term economic plan is working, but lots more to do”..

Labour’s shadow Treasury minister Catherine McKinnell also welcomed the fall in the inflation rate, but said that “most people are still feeling the squeeze”.  “Wages after inflation have now fallen by over £1,600 a year under David Cameron and the link between the wealth of the nation and family finances is broken,” she said.

I don’t know about you, but I think that the continuing fall in inflation, coupled with steady rises in the average earnings of most people, is great news and providing the housing market doesn’t overheat, the future, whilst not yet rosy, is definitely on the up and likely to continue that way for the medium term.

If you would like to calculate your own families’ personal inflation rate, the BBC website has a useful little tool to do just that. Go to http://www.bbc.com/news/business-22523612

David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David’s depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire’s most respected Accountancy Practice. Email David