The fall in consumer price inflation to an annual 3.4% in May from 3.7% in April was in line with a projected path presented graphically in a post a month ago and partly reflected favourable base effects, as well as a seasonally-unusual decline in unprocessed food prices.

The projection has been updated to take account of a recent easing of petrol prices and now shows the headline rate moving down to 2.9% by July, implying no further explanatory letter that month. It remains, however, well above the 2% target during the second half and rebounds in 2011, based on a firming of core price trends as the recovery develops and an assumed rise in the standard VAT rate to 20% in January – see first chart.

Tax changes aside, risks to this forecast are weighted to the upside since it assumes a significant near-term slowdown in core inflation that is at odds with rising price expectations in business and consumer surveys – second chart.

Geek's note: the CPI at constant tax rates (CPI-CT) rose by only 1.6% in the year to May but this should not be used as an estimate of the hypothetical rate of inflation in the absence of this year's VAT hike because the calculation assumes full pass-through of changes. Based, more realistically, on 50% pass-through, CPI inflation would currently stand at 2.5% if tax rates had been constant over the last 12 months (i.e. the mean of the headline rate of 3.4% and CPI-CT rate of 1.6%).