British inflation sank to a six-year low in May, official figures showed yesterday, taking financial markets by surprise and renewing speculation that UK interest rates may have further to fall.
The Office for National Statistics said headline inflation slowed to 1.3 per cent last month, its lowest rate since June 1993 and down from 1.6 per cent in April.
It said underlying inflation tumbled to 2.1 per cent, well below its government-set 2.5 per cent target and the lowest rate since October 1994.
The data will be keenly watched by the Bank of England's monetary policy committee (MPC), which has pledged its readiness to reduce borrowing costs if inflation is set to undershoot.
With the strength of sterling still exerting downward pressure on imports and summer sales looming, that is becoming a distinct possibility.
The MPC shaved a quarter point off interest rates last week taking them to 5 per cent, their lowest since 1977. They are sharply lower than their 7.5 per cent peak last summer but are still double the 2.5 per cent borrowing costs in euro zone countries.
A prolonged bout of low goods price inflation is largely responsible for Britain's enviable inflation performance recently.
Goods prices rose 0.9 per cent year-on-year in May, their lowest increase ever. Service inflation, however, has been above 3 per cent for more than a year, holding fast at 3.3 per cent in May.
