Businesses are not passing on inflation cuts due to weak demand as the consumer price index dropped to its lowest level since November 2009, according to Birmingham Chamber of Commerce.
Business leaders were relieved at the announcement by the Office for National Statistics that CPI annual inflation – the Government’s target measure – dropped from 2.8 per cent in May to 2.4 per cent in June, more than expected.
Inflation has fallen from 5.2 per cent last September due to the waning impact of the VAT hike at the start of 2011, falling energy, food and commodity prices, and a number of bill cuts from utility providers.
Record rainfall also forced clothing retailers to bring forward their summer sales.
Michael Ward, president of BCC, said it was predicted that inflation would continue to fall dramatically as many of the factors which drive inflation upwards begin to abate, such as lower fuel prices.
He said: “Last month saw the lowest rise in commodity and oil prices resulting in a welcome drop in fuel prices.
“However, weaker demand means that retailers and businesses are not passing costs on to consumers.
“The Chamber’s latest quarterly economic survey revealed that the number of businesses reporting that they will raise prices is at its lowest since quarter one 2010 for manufacturers and quarter two 2009 for service firms.”
Mike Ashton, spokesman for West Midlands Chambers of Commerce, said: “It is good news but inflation is still above the Bank of England’s target rate of two per cent.
“Inflation is consistently cited by Chamber members as the main factor putting pressure on them, so any reduction must be welcomed.
“Every effort must now be made to ensure that this reduction in the rate of inflation begins to translate into consumer spending which has been particularly weak for many months.”
Last month’s drop will add weight to the Bank of England’s decision earlier this month to pump more emergency cash into the economy through its quantitative easing programme.
The steeper-than-expected fall is also likely to raise the likelihood of further emergency support later this year as the UK struggles with weak growth.
Britain’s economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2 per cent, following a 0.3 per cent drop in the final quarter of 2011.
Chloe Smith, the Economic Secretary to the Treasury, said: “Inflation has more than halved since September, meaning a little less pressure on family budgets. This lower inflation should support high street spending and growth in the economy in the months to come.”
Alternative measures of inflation also fell, as the retail price index fell to 2.8 per cent in June, from 3.1 per cent in May.
Vicky Redwood, economist at Capital Economics, said the drop was a “pleasant surprise”.
She added: “Admittedly, this was driven by a sharp drop in clothing inflation, which is probably a temporary result of the poor weather denting clothing sales.
“Nonetheless, we think that evidence is tentatively building that weak activity and large amounts of spare capacity are bearing down on underlying price pressures.”