RTTNews - U.K.'s annual inflation slowed to the lowest since January 2008 as food inflation slowed in May, official data showed Tuesday. However, inflation stayed above the central bank's target for the 20th consecutive month.

Consumer price annual inflation eased slightly to 2.2% in May from 2.3% last month, a report from the Office for National Statistics said. This was the lowest since January 2008, but was larger than the expected rate of 2%. Month-on-month, consumer prices were up 0.6%, twice the expected rate of 0.3%.

Meanwhile, core inflation that excludes volatile items rose to 1.6% from April's 1.5%. Economists had expected the core rate to stay at 1.5% in May.

The largest downward pressure on CPI inflation came from food and non-alcoholic beverages. Meanwhile, housing and household services, pulled down by a fall in electricity bills, also contributed to the decrease. At the same time, the largest upward pressure came from alcoholic beverages and tobacco, reflecting the increase in excise duty in the budget.

Commerzbank analyst, Peter Dixon noted that inflation slowed at a slower-than-expected rate in the beginning of the year partly due to weakness in sterling during late last year and a rebound in oil prices. He forecasts inflation to continue to fall and sees as low as 0.5% by September. However, the withdrawal of temporary VAT cut next January could push the inflation rate very quickly back towards 2%.

The ONS report showed that the retail price index, which includes housing costs such as mortgage interest payments and council tax stood at 212.8 in May, up from 211.5 in April. From April, retail prices rose 0.6%. Retail prices were down 1.1% from the previous year, following a 1.2% decline in April. Economists were looking for 0.2% monthly growth and an annual 1.5% fall.

Excluding mortgage interest payments, retail price inflation was 1.6% versus 1.7% in April. Commerzbank expects the retail prices to dip below minus 2% over the summer.

The factors affecting the CPI also affected the RPI, although retail prices experienced an upward pressure from housing where the largest effect came from mortgage interest payments.

David Kern, Chief Economist at the British Chambers of Commerce said Whatever the longer-term inflation risks may be, they are unlikely to materialize in the near future and can only be dealt with after the recession ends. The main priority should be on easing the severe downturn in economic activity and to contain the relentless increases in unemployment, Kern added.

Earlier this month, the Bank of England had retained its key interest rate at a record low of 0.5% and decided to continue with its bond purchase scheme totaling GBP 125 billion using central bank reserves. The BoE expects inflation to stay below target in the coming few years.

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