"UK economy requires emergency cash injections to reverse fall in inflation"

Bob E has read between the lines of an article in The Independent:

The UK economy may have to adopt a more aggressive routine monthly injection of cash from next month after figures today 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 to the lowest level since November 2009. City analysts expect that without intervention the rate may remain unchanged or move below the currently recognised "danger level" of 2%.

Inflation has already fallen from 5.2% since last September and with further declines predicted, the Bank of England is expected to beef up its quantitative easing (QE) programme, which currently stands at only £325 billion following the, in hindsight, rash decision in February by members of the Monetary Policy Committee to suspend the £50 billion a month structured interventions.

Exhibiting his customary prescience, Governor Sir Mervyn King's gave a strong hint that more and more regular QE was needed during his annual Mansion House speech last week. Analysts said it looked likely that the necessary action would nevertheless have to wait until 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 worrying figures today should ensure members vote to renew the programme at the upcoming meeting"...

The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices have also contributed to the problem. Last month, inflation moved to within 1% of the Government's 2% minimum rate, meaning Sir Mervyn had to send a fulsome private letter of explanation to the Chancellor.

A Treasury spokesman today said: "Inflation is now open letter territory. For the second month in a row the rate has fallen, provoking dismay."

In further evidence that some retailers may have been foolhardily cutting prices to draw in customers, overall food and drink prices rose by just 0.3%, compared with the better levels of 1.3% achieved last year.

The ONS said this 0.3% was also driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell. Consideration is being given to attaching special import duties on these goods to address the problem.