British inflation fell more sharply than expected to 4-1/2 year low in May, as food prices fell and as the effects of a late Easter on travel costs faded away, official data showed on Tuesday.
Consumer price inflation dropped to 1.5 per cent last month from 1.8 per cent in April, its lowest level since October 2009, the Office for National Statistics said.
Economists in a Reuters poll had expected the index to fall to 1.7 per cent.
But official data also showed that house prices rose 9.9 per cent in April, their biggest annual rise since June 2010, likely heightening concerns that a bubble may be brewing in the property market.
The Bank of England’s Financial Policy Committee meets on Tuesday and is widely expected to take steps to curb the risks to financial stability from rapidly rising house prices and high levels of indebtedness.
While Britain’s economy has been growing at a rapid pace, low levels of inflation have so far given the Bank room to keep interest rates at their record low 0.5 per cent.
But that could change before the end of the year. The Bank Governor Mark Carney said last week that interest rates could rise sooner than markets previously expected, though for now Britain’s economy still had room to grow without pushing up inflation.
The ONS said inflation in May was subdued by the first year-on-year fall in food prices since 2006, as well as lower clothing prices and air and ferry fares.
Food prices dropped by 0.6 per cent on the year.
The ONS said prices falls were across a broad range of food and soft drinks, and may be due to a price war between major supermarkets.
Core CPI, which excludes food costs and other items but does include transport costs, rose 1.6 per cent.
But while price are falling for some household essentials, the central bank is likely to be concerned about rapidly rising house prices, which in London rose 18.7 per cent on the year.
Excluding London and the south east, house prices were 6.3 per cent higher.
Chancellor George Osborne said on Thursday that he would grant the Bank new powers to impose maximum loan-to-value and loan-to-income ratios on mortgage lending – a step that BoE Governor Mark Carney welcomed.
Data released alongside the CPI by the ONS on Tuesday showed that factory gate inflation in May rose by 0.5 per cent on the year, slowing slightly from 0.6 per cent in April.
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