Fuel, clothing and energy costs tumble as UK inflation falls to 0.5%
THE price of fuel, clothing and energy has continued to drop due to the coronavirus crisis, sending the UK's inflation rate to 0.5 per cent - its lowest level in four years.
The Office for National Statistics (ONS) confirmed the rate of Consumer Price Index (CPI) inflation fell to 0.5 per cent in May following the ongoing pressure on the UK economy.
The drop is down from the 0.8 per cent recorded the month before and means UK inflation is now at its lowest level since June 2016.
Some economists predict inflation could fall to as low as zero per cent over the coming months, while others say the UK is "skidding towards deflation".
Deflation, or negative inflation, happens when the rate of inflation falls below zero.
For households, it means a decrease in the general price level of goods and services - but it can also hit the economy hard as it would mean more redundancies and wage cuts.
What is inflation and how does it affect your money?
INFLATION affects how much everyday items cost, as well as wages and savings rates.
This means it can really impact families' bank balances.
Today's announcement will be good news for households, as falling inflation means the price we pay for goods has dropped.
Inflation, which is measured by the Office for National Statistics, is also what the Bank of England uses as a guide for when it is setting interest rates.
This means inflation can also have a direct impact on mortgage costs and savings rates, as well as paying back debt.
Low inflation is positive for savers because the interest paid on savings is more than the increase in the cost of goods.
At the moment, there is more chance our savings aren't being eroded by inflation as the top savings rate is currently above inflation at 1.16 per cent.
For homeowners, if you're on a fixed-term rate then your repayments won't change because you're already locked in to a deal.
As inflation is directly linked to interest rates, you will only feel the effect when you come to renew.
Variable rate and tracker mortgages follow the base-rate and can go up or down at any time - so you'll likely pay less if inflation goes down.
But low inflation can also mean your debts get more expensive, as the amount you owe remains the same, yet you may find it harder to repay debts or the item, such as house or car, may depreciate in value compared to its initial worth.
Adrian Lowcock, head of personal investing, Willis Owen: "As things currently stand savers may actually be able to benefit from inflation beating interest rates, but as always it is important to shop around.
"For the longer term it is important to look beyond cash which, at low interest rates, would struggle with a return of inflation."
At stable levels, a small amount of inflation is good because it boosts economic output and productivity as well as generating employment opportunities.
But out of control inflation can be disastrous for a country because the cost of essential goods and services can suddenly outstrip the buying power of people's wages.
Check out our inflation guide for more information.
Falling prices also makes it more expensive to repay your debt - we explain how in the box above.
Deflation can happen when supply of goods is higher than the overall level of demand, but it can also be triggered by lower costs of production, or a shortage of money in circulation.
The UK was last in deflation territory in 2015.
Today's announcement shows the current inflation rate is now far off the 2 per cent target set by the Bank of England.
It comes as the latest data from the ONS showed fuel prices fell 16.7 per cent in May - the biggest fall on record.
Fuel prices have been falling due to the coronavirus lockdown affecting global demand for oil, although crude prices began bouncing back last month.
Average petrol prices stood at 106.2 pence per litre in May, while average diesel prices were 113.4 pence per litre - the lowest levels since 2016.
Meanwhile, the price of clothing and shoes tumbled 3.1 per cent in the past month as retailers launched huge sales to encourage shoppers to start spending.
Energy costs, which dropped by 7 per cent, also pushed inflation lower after regulator Ofgem reduced its default tariff cap.
The price of games, toys and hobbies, such as computer games consoles, craft kits, and dolls, also all decreased.
But food and alcohol costs increased, up 1.8 per cent and 2.6 per cent respectively, with supermarkets among the only retailers allowed to stay open throughout the coronavirus lockdown.
The CPIH measure of inflation, which includes housing costs, fell to 0.7 per cent in May down from 0.9 per cent from the previous month.
While the retail prices index (RPI) measure of inflation fell from 1 per cent in May after dropping from 1.5 per cent the month before.
Jonathan Athow, deputy national statistician for economic statistics at the Office for National Statistics (ONS), said: "The growth in consumer prices again slowed to the lowest annual rate in four years.
"The cost of games and toys fell back from last month's rises while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months.
"Outside these areas, we are seeing few significant changes to the prices in the shops."
James Smith, economist at ING, said: "We expect this inflation gauge to stay between zero and 0.5 per cent until the autumn, and probably below 1 per cent through to the beginning of 2021.
"Admittedly, there may well be some pockets where prices actually increase in the short-term.
"Supply chains are still heavily disrupted, and restarting them won’t be easy, particularly given the ongoing risk of further localised lockdowns if Covid-19 flares up again in specific regions or countries.
"All of this inevitably means higher production costs.";
Ulas Akincilar, head of trading at INFINOX, added: "For all the bullish talk about the reopening of England’s high street shops, consumer demand is reeling.
"Prices are falling in most of the goods and services tracked by the ONS as the economy skids towards deflation.
"While the headline rate of CPI remains in positive territory, it has plunged to a third of what it was as the coronavirus hit."
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