The latest price inflation figures show the Consumer Prices Index (CPI) measure of inflation has fallen from 3% to 2.8% for the year to May 2012.
The Retail Prices Index (RPI) measure of price inflation has also fallen, to 3.1% from 3.5% the previous month.
Inflation is falling due to lower prices for motor fuels, food and non-alcoholic beverages.
There is still some upwards pressure on CPI inflation, coming from air and sea transport costs. The timing of Easter this year also had a big impact on the difference between the figures in April and May.
These figures are good news for the Bank of England, confirming their previous expectations that inflationary pressures would reduce this year and CPI would fall towards the government target of 2% over time.
It is the second month that Bank of England governor Sir Mervyn King will not need to write a letter to Chancellor George Osborne to explain why the Bank has missed its inflation target by more than 1%.
Whilst we expect to see price inflation remain slightly above the government target of 2% for a while longer, this fall towards target does give the Bank some more flexibility when it comes to stimulating the economy.
Lower price inflation opens the door to a further interest rate cut to 0.25%, or possibly an extra round of quantitative easing, although the recently announced measures to lend cheap money to banks to lend to customers does reduce the likelihood of more QE.
Photo credit: Flickr/John Trathome
