Inflation for April, as measured by the Consumer Price Index (CPI) has as anticipated fallen back below 3% to 2.8%. This follows last months shock rise to 3.1% CPI, which prompted the governor of the Bank of England to write a letter to the Chancellor explaining why inflation had exceeded the upper boundary of 3%, and guaranteed a rise in interest rates to 5.50% at last Thursdays MPC Meeting (May 10th).

The fall in inflation as due to fall in energy prices that were scheduled to occur during April 07. The more recognised measure of inflation RPI, also fell by 0.3% to 4.50%. The importance being that the RPI is used as the main measure in negotiating annual pay rises, and therefore continues to increase future inflationary pressures on the CPI measure.

However, inflation remains well above the Banks target of 2%, the stated target to be achieved later this year. Therefore should inflation not fail to decline or even rise in the May and June data release then the targeted further increase in UK interest rates to 5.75% by Sept 07 will still occur, and the money markets continue to discount a further rise in UK interest rates by Sept 07.

By Nadeem Walayat
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