UK annual inflation slowed again in May as it still remains above the Bank of England's target rate of 2% according to figures released from the Office for National Statistics (ONS).

The Consumer Prices Index (CPI)

This fell to 2.2% from 2.3% in May; the largest downward pressure affecting the change in the CPI annual rate was from housing and household services. This was mainly due to electricity and gas bills which fell this year but rose a year ago. Also housing rents and water and sewerage charges rose by less than a year ago.

CPI is used by the Government to measure inflation. It does not include council tax or mortgage interest costs. The concern is that CPI could fall further in the coming months.

Retail Prices Index (RPI)

This is another measure of inflation which fell further to -1.1% from -1.2%.

A slight rise in average mortgage interest payments improved the previous decline under the RPI. 

RPI is used to negotiate wage increases, pensions, state benefits and index linked guilts.

Either one of these inflation measures can have a major influence on the economy as they will affect interest rate decisions, pensions and wage settlements.

Some economists are worried that RPI move deeper into deflationary territory.

What is deflation?

Deflation occurs when prices are declining over time. This is the opposite of inflation; when the inflation rate (by some measure) is negative, the economy is in a deflationary period.

The worry is that consumers will keep putting off the purchasing goods, because of deflation, in the hope that the item will drop in price even further.