UK inflation drops to four-year low in May as oil prices slumpUK inflation drops to four-year low in May as oil prices slump
FILE PHOTO: The spread of the coronavirus disease (COVID-19) in Liverpool

By David Milliken and William Schomberg

LONDON (Reuters) – British inflation fell to its lowest level since June 2016 last month as the coronavirus pandemic sucked demand from the global economy and caused oil prices to tumble, leaving the Bank of England free to ramp up its stimulus programme again.

Consumer price inflation slowed to 0.5% from April’s 0.8%, the Office for National Statistics said, in line with the average forecast in a Reuters poll of economists.

Core inflation – which excludes typically volatile energy, food, alcohol and tobacco prices – showed less of a decline, falling to 1.2% from April’s 1.4%. Economists had forecast a small drop to 1.3%.

“There was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months,” ONS Deputy National Statistician Jonathan Athow said.

Most economists polled by Reuters expect the BoE to announce an extra 100 billion pounds of bond purchases when its publishes its June policy decision on Thursday, following on from 200 billion pounds of bond purchases it started in March.

“Inflation is not something that is going to worry the Bank for some time. It will be more concerned about growth,” Neil Birrell, chief investment officer at asset management firm Premier Miton, said.

Britain suffered a record fall in economic output in April, when the economy shrank by more than 20% due to the closure of non-essential businesses to the public to slow the spread of COVID-19.

Last month the BoE said lower oil prices, as well as a regulatory cap on household energy and water bills, were likely to keep inflation below 1% for several months.

The central bank added that weaker demand was likely to put downward pressure on inflation overall – though it would not make sense for all businesses to cut prices in response to reduced demand, and measuring some prices would be hard.

Major factors pushing down on inflation in May included fuel, clothing and transport costs, the ONS said.

Prices for fuel and lubricants showed their biggest annual fall on record, down 16.7% on a year earlier, while clothing prices were 3.1% lower, the biggest drop since July 2010.

Producer output prices – which can give a steer on upcoming price pressures – dropped by 1.4% after declining by 0.7% in April. Economists had pencilled in a 0.9% fall.

(Reporting by David Milliken; Editing by William Schomberg)