Inflation drops to 2.8% as oil prices slide

Iraqi workers are seen at the Rumaila oil refinery, near the city of Basra. A fall in oil prices has taken the heat out of inflation. Photograph: Nabil Al-Jurani/AP

Inflation has slipped to its lowest level in two and a half years, in a rare piece of good news for Britain's recession-hit households.

The Office for National Statistics said the annual inflation rate, measured on the consumer price index, slipped to 2.8% last month from 3% in April, as falling oil prices fed through to cheaper petrol at the pump.

The ONS cited motor fuels as the biggest factor, with petrol prices falling by 4.5p a litre in a single month, to stand at ?1.37.

During May, the cost of a barrel of Brent crude oil on international markets slipped from $120 to $103. It has since fallen further, to $83.

On the retail price index measure, which also includes housing costs, inflation slipped to 3.1% in May from 3.5% a month earlier.

Though inflation is still well above the Bank of England's target of 2%, the fall should help to reassure policymakers that they can take more action to stimulate the economy without sparking a renewed surge in prices.

The Bank of England governor, Sir Mervyn King, hinted in his Mansion House speech last week that the monetary policy committee could unleash a fresh bout of quantitative easing - electronic money creation - alongside the government's new measures for kickstarting credit.

Jeremy Cook, of the currency broker World First, said the data "will trigger a sigh of relief from Threadneedle St" as it gives the Bank further leeway with possible further expansionary monetary policy, such as interest rate cuts or additional asset purchases.

Some members of the Bank's monetary policy committee (MPC) have previously expressed caution about more QE, warning that it could push up inflation, but world commodity prices have been falling in recent weeks amid fears about a slowdown in the world economy. Wednesday's minutes from the MPC's June meeting will show whether any members were calling for more QE.

The ONS said food and non-alcoholic drink prices rose by 0.3% between April and May, compared with a 1.3% increase a year ago, meaning that food prices also contributed to the downward slide in inflation.

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