Unexpected fall in inflation rate

The UK economy could get another emergency cash injection as early as next month after figures showed a surprise drop in inflation.

Falling petrol prices meant the Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, down from 3% in April and the lowest level since November 2009. City analysts expected the rate to remain unchanged.

Inflation has fallen from 5.2% last September and with further declines expected this year the Bank of England should have more leeway on its quantitative easing (QE) programme, which currently stands at £325 billion and was last increased by members of the Monetary Policy Committee in February.

As well as announcing radical measures to prevent a second credit crunch, Governor Sir Mervyn King's annual Mansion House speech last week gave a strong hint that more QE was on the cards.

Analysts said it looked likely that further action could be taken as soon as July 5, when the committee concludes its next two-day meeting.

Vicky Redwood, UK economist at Capital Economics, said: "Mervyn King has already hinted strongly that more quantitative easing will soon be forthcoming and these figures might help to tip any of the more reluctant members into voting for more stimulus at the upcoming meeting."

The decline in inflation was driven by petrol pump prices, as the average petrol price fell by 4.5p per litre between April and May to stand at 137.1p. Last year, the average petrol price rose 2p to 136.3p.

The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices as the global economy weakens have reduced the pressure on household budgets.

Britain's economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2%, following a 0.3% drop in the final quarter of 2011. Last month, inflation moved to within 1% of the Government's 2% target, meaning Sir Mervyn did not have to send a letter of explanation to the Chancellor.

A Treasury spokesman said: "Inflation is out of open letter territory for the second month in a row, which is good news and is providing some welcome relief for family budgets."